Sucheta Dalal :UTI v/s IL&FS -- corporate governance the issue - (14 March 1999)
Sucheta Dalal

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UTI v/s IL&FS -- corporate governance the issue - (14 March 1999)  

The interesting little battle brewing between Unit Trust of India (UTI) and the Infrastructure Leasing & Financial Services (IL&FS) has set the stage for ushering in major changes in the organization of Indian financial institutions (FIs) and to make way for genuine corporate governance.

Last week a newspaper reported that UTI Chairman P. S. Subramaniam, who is attempting to make decent corporate citizens out of companies had `informed’ IL & FS that it wants a three member supervisory board to monitor its functioning on a quarterly basis. UTI, was making this demand as the largest (30%) shareholder of IL & FS. Its reasons: IL & FS has too huge a board of directors for effective supervision and had spread itself thin over too many activities ``without a clear strategic focus’’.

The news report, which appeared a day after IL & FS’s board meeting did not say that UTI’s demand was a condition to approving Ravi Parthasarthy’s ascent from Vice Chairman and Managing Director to CMD, after Deepak Parekh stepped down from Chairmanship. The matter was apparently finalised a few weeks ago and IL & FS was to issue a press statement about the supervisory board.

Instead, it next came up for discussion at the IL & FS board, without being on the agenda for the Wednesday meeting. The UTI representative was not present that day to present its case. At the meeting, several members including R.C. Bhargava (former chief of Maruti Suzuki) and Kesub Mahindra (Chairman of Mahindra & Mahindra) apparently opposed the concept of the supervisory board saying that the Companies Act does not allow its formation. They felt that at best there could be an advisory board, without usurping the responsibilities of the directors. Though the issue has been postponed, a battle line has been drawn. Of course, the official line of both institutions is that there is no rancour and that the UTI demand is merely part of its self - designated role as a vigilant big shareholder.

Several factors sets this battle up as a path breaker for institutional corporate governance. While, UTI’s stand seems perfectly justified, its present circumstances weaken its position. It is in deep trouble even after the budget bailout and needs urgent restructuring of its own operations. One can even say that this should happen before it preaches corporate governance to others. Ironically, it is the still-secret Deepak Parekh’s committee which has recommended specific measures for restructuring UTI. Among other things, it has asked for a recapitalisation of the trust by raising the `permanent capital’ of the initial sponsors from Rs five crores to Rs 500 crores. Logically, the sponsors, could demand a similar supervisory board, to oversee UTI’s huge operations managed by a few fund managers, especially when such fund managers have done so badly in the past.

UTI’s stand with regard to IL&FS also has a lot of sympathy among its shareholders. Its activities, apart from all those in its name include among many others -- stock broking, merchant banking, venture capital, social infrastructure (which includes distance education and hospital management) and strategic investments in projects such as Iridium, electricity transmission etc. It future plans include getting into software development. It has a mixed bag of powerful shareholders and international associates who help it tap international funds. Apart from a big ally in Chairman Deepak Parekh, its other major shareholders include IFC Washington, Credit Commerciale of France, Orix of Japan, State Bank of India, and its own Employees’ Welfare Trust. It is also connected to several others such as American International Group, Commonwealth Development Fund through various activities.

While the company has never been listed it is not as though IL & FS did not want to go public. It is just that the market did not seem right whenever it made the attempt in the last seven years. UTI was at the receiving end of its attempts and ended up holding 30 per cent of the equity (instead of 18.2 per cent initially) after some financial maneouvers including warehousing and de-warehousing its shares. Apart from more accountability, UTI is naturally keen on a clear exit route.

Its complaint regarding the large board is also valid. Its own 30 per cent gives it only one board representation, while the IL & FS’s board (like that of Industrial Credit and Investment Corporation of India) is packed with at least five employee directors, allegedly allowing the company to do exactly what it pleases. IL&FS does make profits, but several shareholders believe that it could earn much more if it did not spread itself thin over what one of them calls various ``hobbies’’.

Mr. Subramaniam’s friends apparently warned him not to ``take on’’ IL&FS and its powerful allies at this stage. But, UTI is apparently banking on a little ace. The finance ministry, worried about the pathetic market perception of the financial institutions, has been quietly working on a corporate governance code for financial institutions. A report commissioned by it before the budget has apparently raised similar issues as UTI has, including appointments and packing of the board with employee directors. And the ministry does have reasons to worry. If IL&FS has escaped market valuation, then IDBI is languishing at Rs 30 (against its original issue price of Rs 134), ICICI is at Rs 43 and IFCI poised to create history by dropping below par.

As in everything else, the issue will finally be resolved by the finance ministry. It will be a choice between whether friendly finance ministry mandarins ensure that IL & FS does not have ``some self opinionated people breathing down its neck’’ or it decides to make FI managements’ more professional --including UTI -- by forcing them to adopt a common set of rules for better accountability.
-- Sucheta Dalal