Sucheta Dalal :PJ Nayak's strange exit from UTI Bank
Sucheta Dalal

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PJ Nayak's strange exit from UTI Bank  

Dec 20, 2004

In a system that is woefully short of people with competence, he should have been nurtured

On the morning of December 15, a top source in the finance ministry told me that although there was a move to convert UTI Bank into a public sector entity it would be allowed to retain its private sector character. Also, that PJ Nayak would be given another term. By evening, we learnt that Nayak had been manoeuvred out of a job that he had handled very competently. Was the finance ministry then unaware of the machinations afoot at UTI Bank?   

UTI Bank, like IDBI Bank, exists in the strange twilight zone created by the RBI when it handed out new banking licences in the 1990s. They are private sector banks but entirely owned by public sector institutions, subject to most of the intrigues of government bodies.

Why should the government have a say in an allegedly board-managed, allegedly private bank? There are several good reasons why it ought to have been better informed about the decision to deny PJ Nayak a second term at the bank. The most important one is that the board decision to split the post of chairman and managing director was never about PJ Nayak’s competence or about the bank’s best interest; it was the future existence of UTI Bank.

• Was the finance ministry unaware of the machinations afoot at UTI Bank? v By mismanaging the situation, the government has dealt a blow to morale

• To revitalise regulatory bodies, competent people must be treated well

Here is the story pieced together from informed sources. For the last eight months, UTI Bank has been trying hard to raise resources and had eventually opted for the Global Depository Receipt (GDR) route to shore up capital. Its main promoter, Specified Undertaking of the Unit Trust of India-I (or SUTI), however, wanted to fund UTI Bank. This would have increased SUTI’s holding in UTI bank to over 40%. Since SUTI is government-owned, this would improve the case for UTI Bank’s merger with IDBI Bank.

With M Damodaran as chairman of UTI Mutual Fund, SUTI and IDBI Bank, the conflict of interest was obvious and enormous, even if Mr Damodaran was not a director on the UTI Bank board. The government, as owner, ought to have had a direct say in the fate of UTI Bank rather than permit the charade of a board decision to remove Nayak through the specious excuse of splitting the post of chairman and managing director.

Nayak was given a Hobson’s choice. It was made more humiliating because Mr Damodaran had himself recommended merger of the posts of chairman and managing director at three other institutions from which he stepped down as chairman only last fortnight (National Stock Exchange, National Share Depository Ltd and IL&FS). More pertinently, the post is not split at any PSU bank. The issue of whether UTI Bank should remain a private sector entity and whether PJ Nayak was correct in resisting SUTI’s overtures is, however, open to debate. While the modern, reformist view would be to keep the bank in the private sector, there is little doubt that it will be the first takeover target if the government allows foreign banks to acquire a majority stake in private banks. This means that a bank, set up by a 100% public sector entity (Unit Trust of India) will pass into foreign hands. That, in my view, is hardly a better alternative to merging UTI Bank with IDBI Bank. Many of us believe that HSBC with its 15% stake is just waiting for a takeover opportunity.

The RBI must also share the blame for Dr Nayak’s messy exit. It allowed UTI, a monolithic public sector mutual fund, to set up a private bank despite criticism and opposition from the then Sebi chairman and leading bankers. The December 15 board meeting only exposed the sham of this private structure.

It must be said in Dr Nayak’s defence that he could hardly be expected to preside over the demise of a bank that he has nurtured and turned around (although he could have messed up his record with a merger with Global Trust Bank in 2001). This applies to all public sector banks. The government hopes that bank chairmen will get together to discuss synergies and voluntarily merge each other, knowing fully well that it will halve the seniormost positions and allow only one person to become chairman. This is a fanciful expectation.

As Mr Damodaran once told me, “Nobody will push that. Government as majority shareholder must not fight shy of saying that yes, we will follow the process, we will go through court orders, but as majority shareholders, we believe Bank A and Bank B have synergies and they must be merged.”

Since the government abdicated its responsibility and failed to have an open discussion, it led to a sordid drama where public sector nominees and another PSU man (Yash Mahajan of Punjab Tractors who is an independent director) proposed a move that would have been impossible for a proud man like Dr Nayak to accept.

In a system that is woefully short of people with competence and impeccable integrity, PJ Nayak was part of a unique minority. He should have been nurtured and protected, rather than treated shabbily. The irony is that M Damodaran, who is supposed to be behind this move, has a background that is astonishingly similar to Nayak’s. Both were joint secretaries in the finance ministry before moving to UTI and established their reputations by cleaning up the mess there. And both are highly regarded for their competence and integrity. The difference is that Damodaran is high on people skills and Dr Nayak, although a hero to his staff, is woefully lacking in that department.

By mismanaging the situation at UTI Bank, the government has dealt a blow to the morale of honest officials who are being persuaded to take on challenging assignments at various regulatory bodies. If the government wants to revitalise regulatory bodies, improve supervision and break out of the gridlock of self-serving retirees controlling key posts, it ought to have ensured that honest and competent persons are treated well.

-- Sucheta Dalal