Sucheta Dalal :ICICI's winning formula (5 November 2001)
Sucheta Dalal

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ICICI's winning formula (5 November 2001)  

Here are insights from a reader that should agitate all stakeholders. The swap ratio for creating the universal bank is two ICICI shares to one of ICICI Bank. In March 2001, ICICI Bank had swapped two of its shares for one of Bank of Madura. This means that four ICICI shares equal to one of Bank of Madura. What a fall for the mighty financial institution.

The swap ratio of shares however, has no correlation to the salaries of top management. Here it would be a reverse 6:1—that is ICICI’s top honchos earning six times those at the Bank. Will the pay scales be revised downwards once it becomes a universal bank? Unlikely.

ICICI’s top duo KV Kamath and Lalitha Gupte had to forego their allocation under the employees stock option plan [ESOP] of ICICI Bank (started in 2000), since the RBI does not permit ESOPs to bank directors. But guess what, Kamath and Gupte have got themselves 150,000 shares of the bank as employees of ICICI [page 17 of the annual report].

Smart people always corner the cream? ICICI too has an ESOP (since 1999) under which share were allotted at Rs133, Rs 85, and Rs 82 in the last three years. No employee exercised the allocation right because ICICI’s market price had tumbled way below the exercise price. No problem. ICICI’s management has decided to grant an additional bonus to all employees since ESOPs get prematurely terminated with the merger. We wonder whether the remuneration committee of ICICI only applauds such creativity and ingenuity?

The first divestment of 25 per cent of ICICI Bank shares that were held by ICICI (in 1997) gave it a profit of Rs 112 crore; its next divestment of 28 per of the Bank’s shares gave it a further profit of over Rs 380 crore and the market value of the remaining Bank shares which ICICI holds would have provided cover for its suspect equity investments exceeding Rs 9,000 crore. On October 16, the RBI spoiled the party by changing the provisioning requirements for equity investments.

So ICICI responded by proposing a Special Purpose Vehicle to carry its 48 per cent equity holding in the Bank even after merger, which will thus continue to provide the cover for the low-grade equity investment! ICICI’s share price has fallen from Rs 113 at the end of April 1996 when KV Kamath took charge to Rs 51 now. But he remains unaffected by it all. He got another five-year term in May 2001, a 100 per cent pay hike (to offset the obvious reduction in ‘performance bonus’?) taking it to around Rs 175 lakhs and is on the finance Minister’s advisory committee. He has now begun his second term by extinguishing ICICI itself. Moral: smart guys are in management and get all the goodies; investors get nothing.

The Rs 2,000 cr deal

While the Reserve Bank of India mulishly opposes an automated debt market with a equity-style clearing system, the most outrageous deals are going unchecked in the debt market. One of the most whispered about ones is between a financial institution and a large corporate house. The institution allowed the company to buy back debt worth Rs 2,000 crore at way below the market price. The company pocketed a whopping profit of Rs 235 crore in a single deal.

What is worse, the deal was sealed by the institution’s super-savvy CEO himself, that too after verifying the going market rates for the highly liquid debt instruments from his treasury department. Such a bonanza could not have been without a quid pro quo. Some say it was a political payoff routed through the business house to obtain some crucial clearances. So long as the Reserve Bank of India allows a largely unregulated phone market to operate, such deals will continue and will also be difficult to prove. In fact, the central bank’s ability to slow down reform and to get away with it is amazing.

Despite frequent criticism, it continues to hold back market reform by failing to introduce Electronic Fund Transfers on a real time basis.

Reluctant SEBI?

News reports says that SEBI postponed its decision to amend open-offer rules for public sector undertakings and peg the offer price to that paid by the successful bidder for want of time. At the same time anonymous SEBI sources told newspapers that SEBI was against amending the rules and would prefer to peg it at the average 26-week market price. This seems strange, given that SEBI neither noticed nor stopped price manipulation of CMC shares which was the first divestment proposal after the amendments. If investors have no objection to getting the same price as the successful bidder why should SEBI? Does it imply that SEBI wants to keep a window open for price manipulation?

-- Sucheta Dalal