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ICICI, Bank merger swap spawns ADR arbitrage

Sangita Shah

The American depositary receipts of ICICI and ICICI Bank were major attractions during the last 10 days following the announcement of a reverse merger between the two companies.

Between October 24 and November 1, the ADR of ICICI Bank gained 15.42 per cent, while the ICICI issue lost 5.56 per cent. This correction corresponds to the merger swap ratio of 5:4 ADRs.

According to data provided by the ADR/GDR market monitoring agency Instanex Capital Consultants, the price differential between the two ADRs gave an arbitrage opportunity of around 14 per cent on their closing prices of $6.80 in the case of ICICI and $4.79 in the case of ICICI Bank on November 1.

The reverse merger deal calls for an exchange ratio of one domestic equity share of ICICI Bank for two domestic shares of ICICI Ltd.

Since each ADR of ICICI Ltd. represents five domestic shares, ICICI Ltd's ADR holders will receive five ICICI Bank ADRs in exchange for four ICICI Ltd. ADRs.

The uptrend in prices of both the ADRs had begun last month. While ICICI swirled up from around $ 5.90 on October 4 to peak at $7.25 after announcement of the merger, ICICI Bank also moved up similarly from $3 to $5.25 during the same period.

However, towards the fag end of last week both the ADRs lost steam and a consistent drop in value and volume was witnessed.

Post merger announcement, Moody's Investors Service had said that the proposed merger of ICICI Ltd with ICICI Bank is likely to create a financially stronger entity, which will have positive implications for the debt obligations of ICICI Ltd.

The rating agency added, however, that this transaction would not, on its own, lead to a ratings upgrade.

Moody's noted that the merger transaction, which could be concluded within the next six to nine months, would have a positive impact on both the franchise quality and risk profile of ICICI Ltd.

It said that the merger would combine the large capital base of ICICI Ltd with the strong deposit raising capacity of ICICI Bank, giving the merged entity greater flexibility to develop profitable business lines.

It would lead to the creation of the second largest-bank in India, with considerable competitive advantages in terms of technology, processes and human resources.

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