ISEC Delisting: Did small cap funds just lose you Rs 261 crore?
Apr 03, 2024 / Reading Time: Approx. 3 mins
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The biggest story in India today is not being highlighted by the media because it is no longer 'news' - it is old. But for millions of investors in mutual funds and in individual stocks the story is timeless and deserves a constant spotlight.
The recent bulldozing of a highly questionable swap ratio used by Goliath ICICI Bank to grab the 25% shareholding of its subsidiary - the listed ICICI Securities (ISEC) that it offered to investors via an IPO in April 2018 - should be a wake up call that the claims of governance trumpeted form the rooftops of corporate India could be nothing more than a glossy sham.
If the small cap mutual funds that owned ISEC shares as of February 29, 2024 were owners of the shares on the cut-off date for voting on the proposed swap ratio, depending on how they voted, they either:
-
Fought hard to prevent a potential loss of Rs 67 crore to Rs 261 crore to unit owners of their fund, OR
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Suspended all norms of custodianship and responsibility and potentially lost Rs 67 crore to Rs 261 crore on behalf of the unit owners of their small cap funds.
The size of the damage.
A longer story on the unfair swap ratio accepted by the Board of ISEC and canvassed for by an army of ICICI Bank representatives is explained here
In a nutshell, the minority shareholders own 81.7 million shares.
The suspect swap ratio values ISEC at Rs 722 per share.
If ISEC was valued the same way as Angel One, a listed company in the same lines of business as ISEC, the price of the ICICI Bank offer to ISEC minority shareholders should be Rs 940 per share - an increase of 30%.
If ISEC was valued as 360 ONE, then the price to the minority shareholders should be Rs 1,576 per share: an increase of 118%.
| Table 1: Loss to Minority Shareholders from a suppressed swapped ratio |
|
A.
ISEC Derived share price based on Swap Ratio proposed by ICICI Bank and approved by ISEC Board (INR per share) |
722 |
B.
ISEC derived share price if valued at 20.4x FY24E Earnings (lowest multiple for peer Angel One) (INR per share) |
940 |
| Loss at current swap ratio (INR per share) |
218 |
| Total number of minority shares in issue |
81,700,393 |
| Total loss for ISEC Minority shareholders, INR million |
17,811 |
C.
ISEC derived share price if valued at 34.2x FY24E Earnings (360 ONE peer valuation) (INR per share) |
1,576 |
| Loss at current swap ratio (INR per share) |
854 |
| Total No of minority shares in issue in Millions |
81,700,393 |
| Total loss for ISEC Minority shareholders (INR million) |
69,772 |
Source: Calculations are based on closing prices of Angel One and 360 ONE on March 11, 2024
Additional data sourced from ACE, www.PersonalFN.com shows that five small cap mutual funds held shares in ISEC (and do not have any shares in ICICI Bank).
If these funds voted FOR the swap ratio proposed by ICICI Bank, then the collective loss to unit owners in these five mutual fund schemes was between Rs 67 crore and Rs 261 crore - depending on whether you believe the swap ratio for ISEC should have been valued at the PE multiples of Angel One or 360 ONE.
If these 5 small cap mutual funds fought for their unit owners and voted against the swap ratio proposed by ICICI Bank, then they are trying to save their unit owners and our heartiest congratulations to them.
Ask your mutual fund how they voted - then let us know how they voted and www.PersonalFN.com will send the fund managers a bouquet of roses for their fighting spirit.
Table 2: How much investors in each fund would benefit with a higher swap ratio
| Fund |
Shares held of ISEC |
If SWAP at Angel One (INR) |
If SWAP at 360 ONE (INR) |
| Aditya Birla SL Small Cap Fund |
1,097,439 |
239,241,702 |
937,212,906 |
| Axis Small Cap Fund |
460,120 |
100,306,160 |
392,942,480 |
| Bandhan Small Cap Fund |
233,544 |
50,912,592 |
199,446,576 |
| Baroda BNP Paribas Small Cap Fund |
550,000 |
119,900,000 |
469,700,000 |
| Mahindra Manulife Small Cap Fund |
717,674 |
156,452,932 |
612,893,596 |
|
|
666,813,386 |
2,612,195,558 |
Portfolio Holdings as of February 29, 2024
Source: ACE MF
Warm Regards,
PersonalFN Research
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