Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the existing debt instruments of ICICI Securities Limited (I-Sec) at ‘CRISIL AAA/Stable/CRISIL A1+’. The ratings continue to reflect the company’s majority ownership by, and strategic importance to, ICICI Bank Ltd (ICICI Bank; rated ‘CRISIL AAA/CRISIL AA+/Stable'), its strong market position in the retail broking segment, and robust risk management systems. These strengths are partially offset by uncertainties inherent in capital market-related businesses.

 

CRISIL Ratings has also taken note of the scheme of arrangement for delisting of equity shares of I-Sec by issuing equity shares of ICICI Bank to the public shareholders of I-Sec in lieu of cancellation of their equity shares in the company, thereby making I-Sec a wholly-owned subsidiary of the Bank. The scheme has been approved by the respective board of directors of both the companies, stock exchanges, shareholders, and is now subject to NCLT approval.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of ICICI Securities Ltd and its subsidiaries, collectively referred to as I-Sec. This is because these entities have significant operational and management linkages and operate under a common brand. CRISIL Ratings has also factored in the strong support from the parent, ICICI Bank, given the strategic importance of the entity to the parent along with the shared brand name. ICICI Bank is the majority shareholder of I-Sec, with a shareholding of 74.7% as on March 31, 2024.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to and majority ownership by ICICI Bank

ICICI Bank held 74.7% stake in I-Sec, post the initial public offering in March 2018 and offer for sale (OFS) in December 2020. However, in a recent announcement in June 2023, ICICI Bank had announced to delist and make I-Sec its wholly owned subsidiary subject to requisite regulatory approvals. Institutional and retail broking is a key activity for the ICICI group, and I-Sec not only enables the group to provide the entire range of products related to capital markets, but also enhances diversification of the group’s revenue profile. I-Sec distributes many financial market products, including insurance, mutual funds, loans, etc, for the ICICI group.

 

• Strong market position in the retail broking segment

ICICI Bank, along with its group companies, has a strong presence in all major financial segments, including retail broking. I-Sec is a strong player in the retail equity broking business with ~99 lakh client base and among top players in online retail broking. I-Sec also has a strong presence in the distribution of financial products (mutual funds, loans etc) and it is third largest distributor of mutual funds among non-banks. It is among the top players in the investment banking space and specializes in issue management. CRISIL Ratings believes that I-Sec will maintain its leading position in the equity-broking segment over the medium term on the back of its strong reach, sound research capabilities, and comprehensive and sophisticated internet-based trading platform.

 

It has successfully scaled up its margin trading book over the past years and consequentially its MTF lending book stood at ~11,640 crore as on March 31, 2024.

 

• Robust risk management systems 

Risk management and monitoring systems are adequate to mitigate risks arising from uncertainties inherent in the retail-broking business. Majority of I-Sec clients’ are under the three-in-one model for its online retail broking, wherein the client’s bank account and demat account in ICICI Bank, and icicidirect.com trading accounts are all interlinked.

 

On the investment banking side, I-Sec follows a sound system for selection and execution of underwriting mandates. Other aspects of the risk management framework for margin financing include maximum exposure limits per client, stock-wise exposure limits for each client, and stock and sector exposure limits across the company as a whole. The company has also clearly defined limits for undertaking proprietary trading.

 

Weakness:

• Uncertainties inherent in capital market-related businesses

Over the past couple of years, the broking industry has witnessed a dynamic regulatory environment. With the objective of enhancing transparency, limiting misuse of funds and safeguarding investor interests, SEBI has introduced several changes. Some of these include margin pledge/re-pledge mechanism, daily client collateral reporting and disclosure, collateral allocation at clearing corporations by brokers, and upfront margin collection for intraday positions. More recently, SEBI has approved blocking of funds facility for trading in secondary markets, and non-usage of client deposits for availing bank guarantees (BG) by brokers, which aim to prevent misuse of client funds, broker defaults and consequent risk to investor capital. This is similar to the Application Supported by Blocked Amount (ASBA) facility already available for the primary market, which ensures movement of money only when an allotment happens.

 

• The equity broking business is cyclical in nature; brokerage volumes and earnings are highly dependent on the level of trading activity in the capital market. I-Sec reported a profit after tax (PAT) of Rs 1,697 crore in fiscal 2024 (with a return on equity [RoE] of 50.0%), as compared to, Rs 1,118 crore in fiscal 2023 (RoE of 42.2%).

Liquidity: Superior

I-Sec’s liquidity position is comfortable due to agency nature of its business and healthy liquidity cushion in form of cash and bank balance of Rs 153 crore, liquid investments (including fixed deposits) of Rs 10,634 crore, and unutilised bank lines of Rs 2,750 crore as on April 21, 2024. Apart from this, I-Sec has healthy inflow from its other assets which can be liquidated and realized at short notice. The repayable borrowing till September 2024, as on the same date was Rs 13,949 crore, in the form of commercial paper. I-Sec also benefits from the support from ICICI Bank.

 

ESG profile

CRISIL Ratings believes that ICICI Securities’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

ICICI Securities has an ongoing focus on strengthening various aspects of its ESG profile.

 

ICICI Securities’ key ESG highlights:

 

• The Scope 1 and Scope 2 emissions in FY23 were 46% lower than FY19 baseline and have targets for reducing energy consumption by 20% and paper consumption by 35% by FY25 from FY19 baseline.

 

• Installation of water meter in 48 branches and 3 corporate offices for tracking water consumption metrics to monitor and identify abnormal fluctuations and installed 8,588 LED lights resulting in saving 14,675 KWH electricity per month on an average.

 

• Adopted employee-oriented policies covering areas such as growth & development, employee benefits, grievance redressal framework, health & safety and prevention of sexual harassment at the workplace which endeavors to provide an environment of care, nurturing, opportunity to accomplish professional aspirations and inclusion.

 

• Majority of the board members are independent directors, none of the independent directors have tenure of more than 10 years and there is a segregation in chairperson and executive positions. It has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. ICICI Securities’ commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes I-Sec will maintain its strong market position in the retail broking and investment banking segments and remain strategically important to ICICI Bank.

Rating Sensitivity Factors

Downward Factors

• Downward change in the credit risk profile of ICICI Bank by 1 notch could have a similar rating change on I-Sec
• Any material change in the shareholding or support philosophy of ICICI Bank impacting the quantum and timing of support

About the Company

I-Sec, a majority owned subsidiary of ICICI Bank, offers broking services to institutional and retail clients in the cash equity, derivatives, currency and commodities markets. Apart from strong online presence, it has well spread out distribution network of 134 branches as on March 31, 2024. I-Sec also distributes public issues to corporates and high-net-worth individuals and has a strong presence in investment banking. It has a large client base of around 99 lakh customers (as on March 31, 2024) across business segments. It is also growing its wealth management business. I-Sec distributes many financial market products, including insurance, mutual funds, digital loans, etc, for the ICICI group. In addition, I-Sec also distributes most financial market products of other players in the market.

 

For fiscal 2024, I-Sec reported a PAT of Rs 1,697 crore on total income of Rs 5,051 crore, as against, a PAT of Rs 1,118 crore on total income of Rs 3,426 crore during the previous fiscal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7-365 days	25000	Simple	CRISIL A1+
NA	Non-convertible debentures*	NA	NA	NA	50	Simple	CRISIL AAA/Stable

*Yet to be issued