UTI has done enough to ensure that its past will not stand in the way of a successful public offer.
Who Would Invest In UTI Mutual Fund?
By Sucheta Dalal
The Rs 20,000 crore UTI Mutual Fund (UTI MF), led by chairman M Damodaran, is working on a new ownership structure for itself, whereby a part of the holding will be widely distributed among the public, wrote Sourav Majumdar in The Financial Express last week.
He said this is part of UTI’s effort to eliminate the conflict of interest inherent in UTI MF’s current structure where all its four sponsors — Life Insurance Corporation of India, Bank of Baroda, State Bank of India and Punjab National Bank — have their own mutual funds. My first reaction was — isn’t UTI jumping the gun?
Sure, it is the season for successful public sector disinvestment, but in UTI’s case, it would mean an offer to the same public that was shattered by its double collapse over the last five years. Isn’t it a little premature to go public? Public memory is indeed notoriously short; but surely, it would need more than a one-year performance by the new UTI country to attract investors to invest in its Asset Management Company (AMC). Although investment in an AMC or a holding company is very different from investing in a fund, I felt that investors and experts would still be sceptical. Also remember that the thinking during its second revival phase was that a 40 per cent stake in UTI MF’s AMC would be offered to a strategic investor, not the public.
I felt that investors would worry about the future of UTI MF when Mr Damodaran was no longer its chairman and that the possibility of government interference would be a serious handicap (remember disinvestment minister Arun Shourie’s recent statement that UTI’s Index Fund ought to have supported the market more in the run up to six public sector issues).
The FE story also discussed another possibility. It said, “the government has already initiated discussions with other banks and institutions which do not have their own funds, with a view to replacing the current four”. Wouldn’t that be a worse option? One set of public sector banks replacing another, with no sign of UTI being privatised? The public issue seemed a better alternative, especially when there is no talk anymore of a strategic investor.
I decided to test out the reaction to UTI’s proposal through a rough survey that polled a cross-section of 20 well-known individuals connected with the capital market, who cannot be named. They include lawyers, regulators, investment bankers, brokers, fund managers, politicians, investor activists, researchers, bankers and businessmen. I received 16 replies. To my surprise, a majority of them were in favour of investing in a UTI public offer. Only one was an emphatic “certainly not”, two said they would ‘wait and watch’; three (a regulator, a businessman and a mutual fund chief) were neutral because they don’t invest in equities or the market. A banker-academic says that it would depend entirely on the price, an investor activist would seek advice before deciding and a lawyer was undecided.
An industrialist was astonishingly supportive, both of UTI MF in its present avatar and the public sector institutions. A 40 per cent public holding, he believed, would make the UTI management as well as the government more accountable. He then went on to express great faith in the public sector in general and even castigated the media for being unduly harsh on public sector undertakings and politicians. He had a valid point. He said that the media doesn’t seem to bat an eyelid when private sector industrialists splurge shareholders’ funds on their private jaunts and extravagant lifestyles. Or, when they openly flaunt the fact that private jets (paid for by shareholders) are used for trips to watch cricket matches, attend weddings or lent to friends to attend film award events in India and abroad. But public sector transgressions are ripped apart by the press even when these are less serious.
One broker, taking a larger and more academic view says — “an AMC as an investment is not an attractive proposition at all, because the returns are a little cyclical and partly depends on the capital market”. However, in UTI’s case, the number and variety of its schemes is probably wide enough to even things out. Interestingly, two different fund managers (one heading an Indian fund and a foreign one) known for their independent views were both supportive of a sale to the public.
Investment in an AMC is not as volatile as that in a fund, said one; he also felt that the precise combination of political support, weak regulator and bad fund management may not happen as easily if UTI MF has a substantial public shareholding. Further, he said that the government could still find a strategic investor, at a later date, and realise better value for its 60 per cent holding or create an opportunity for retail investors to make some money.
The second fund manager said: “UTI is a great business, but although there are management concerns, I would buy, hoping that at some point it would be sold”. He also says: “An AMC has better value when sold, rather than when it is in business. Zurich and Kothari Mutual Funds are examples”. Maybe the government should keep that in mind when deciding on UTI’s new structure. The foreign fund manager also believed that although the public sector had its share of problems, it was under-rated.
A mutual fund analyst says that it is a difficult decision to make, but he likes UTI’s present managers and would invest because “they do have market share”.
Finally, an activist politician says that he would certainly invest, at least to ‘motivate and encourage’ the company.
To me, the findings of the little survey were an eye opener. UTI MF’s financial performance has certainly been remarkable. Even the Special Unit Scheme used to bailout UTI has recouped its entire investment and more. And it seems that UTI has done enough to ensure that its past will not stand in the way of a successful public offer. On could argue that investment experts are less likely to judge UTI by its past record, but it is they who will influence public opinion when a public issue is planned.