Sucheta Dalal :Infrastructure merger (11 May 2003)
Sucheta Dalal

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Infrastructure merger (11 May 2003)  

In 1996, when the Chennai-headquartered Infrastructure Development Finance Company Ltd (IDFC) was set up, it was obvious to everybody that it was duplicating what the Infrastructure Leasing & Financial Service (IL&FS) was supposed to do.

But the then Finance Minister P. Chidambaram wanted a financial institution based in Chennai and got his way. For the next two years or more, IDFC and IL&FS had a common chairman in Deepak Parekh; many of its shareholders—Indian and foreign—are also the same. We now learn that the obvious merger of IDFC and IL&FS is finally being discussed.

The trigger may have been Unit Trust of India’s (UTI-I) need to divest its 22 per cent stake in IL&FS and the fact that it can’t find any buyers. The International Finance Corporation (IFC), Washington, which holds shares in both institutions, wants to exercise its put option and exit from IL&FS, but neither UTI not HDFC, which were to pick up IFC’s stake when it chose to exit, want additional shares.

According to our source, the fact that both institutions are private should make the merger easier. One a lighter note, the prospect of moving into IL&FS’s dazzling new office building in Mumbai should make IDFC amenable to a merger.

UTI’s other investments

An IL&FS-IDFC merger would reduce UTI-I’s holding in the new entity, and UTI Bank is clearly its most encashable investment, but what happens to all the other institutions that UTI helped to build in its avatar of a development finance institution? Apparently, UTI may not do too badly with those too.

It has already sold its stake in the Discount and Finance House of India to State Bank of India (SBI) at a higher price than the Reserve Bank got for its stake. The controversial Stock Holding Corporation of India (SHCIL) figures prominently and controversially in the Action Taken Report (ATR) on Scam 2000, but its large custodial business apparently has many potential buyers among the foreign custodial firms, if the government agrees to sell out.

As for the rest — the holdings in National Stock Exchange, OTCEI, National Share Depository and the stock brokerage and registrar outfits — we learn that they will all be auctioned ‘through a fair and transparent’ process.

Valuing UTI-II

As for UTI-II (comprising the NAV-based schemes of UTI), despite the confusion over whether a big chunk of its equity will be sold to a strategic partner within three years or five, the government has already ordered a detailed valuation of the Fund.

Audit firms PriceWaterhouseCoopers (PwC) and S.R. Batliboi & Co are doing a general due diligence and overall valuation of UTI-II, while PwC, Chandabhoy Jassoobhoy and Khimji Kunverji & Co have been assigned specific audit of various schemes.

When UTI was split into two, and SBI, Life Insurance Corporation of India (LIC), Bank of Baroda (BoB) and Punjab National Bank (PNB) were made its sponsors they were given three years in which to pay government for the privilege. We learn that only SBI is keen acquiring control over UTI-II by enhancing its holding.

Naturally, it is also keen on the outcome of the valuation exercise. But while government may want to get the best value for UTI-II, SBI will want to get it at the lowest cost. If the price suits SBI then one may see UTI-II merging with SBI Mutual Fund before the three-year period is up.

Numero Uno offer

Bollywood actor-producer Sanjay Khan was at the UTI last Thursday with an offer to buyback its controversial holding in his company Numero Uno. UTI had bought the shares at Rs 500 each in a private placement deal and the company had confidently claimed, in the heydays of the Ketan Parekh-led bull mania, that it would compensate UTI for any loss in the transaction.

The Joint Parliamentary Committee (JPC) had instructed UTI to pursue civil and criminal proceedings against Numero Uno and Ambit Finance, which placed the shares. It also sought action against UTI officials responsible for processing the transaction and approving the deal.

Sanjay Khan’s buyback offer was apparently in response to a legal notice from UTI. But Khan’s offer was far lower than what UTI paid for the shares, and the matter may end up in litigation. While Sanjay Khan may face prosecution, the Action Taken Report to Parliament is completely silent about the role of UTI officials who did the deal.

Market reports say that investment in Numero Uno, like other scandalous private placement deals by UTI, was cleared at the highest level in the institution.

-- Sucheta Dalal