Road to listing: Asset manager UTI MF still faces bumps along the way

UTI MF's equity assets, for instance, have grown 117% in the past six years

Despite the change in guidelines limiting crossholding in mutual funds (MFs) to up to 10 per cent, listing may not be a given for UTI MF, the country's sixth largest asset manager.

Three out of the four government shareholders - State Bank of India (SBI), Life Insurance Corporation of India (LIC) and Bank of Baroda (BoB) --- will have to compulsorily dilute their stake in the asset management company (AMC) besides vacating their seats on the UTI Board. Each of these entities is a sponsor of other mutual funds.

The trio along with Punjab National Bank (PNB) currently own 18.29 per cent each of the paid-up capital of the AMC. PNB recently reached an agreement to relinquish ownership in Principal-PNB Asset Management.

The road to listing won't be easy, especially if LIC sticks to its guns. In 2016, T Rowe Price, PNB and BoB had given UTI a 'listing notice', allowing the AMC to appoint a banker and conduct a feasibility study for the IPO. In 2017, the AMC went ahead with the study and held informal talks with investment bankers. LIC, however, refused to greenlight the proposal.

If the IPO does get shareholders' nod, T Rowe Price may be disinclined to dilute its stake in the IPO below its existing 26 per cent, the threshold required by Indian law to block special resolutions, said experts. Maintaining a status quo will give it greater control vis-a-vis other shareholders diluting in the IPO, a situation the Indian government may not be too happy with.

If anything, T Rowe might want to buy shares from the open market, post listing. In an interview to a publication in 2016, a T Rowe Price member on the UTI board had stated that the asset manager would consider increasing its stake if the government so desired. "T Rowe Price is quite keen to raise its stake in the AMC. In fact, it may be in the best interest of all shareholders if they sell out to T Rowe," said a person who has worked with a public sector AMC.

T Rowe Price declined comment on the matter.

"In theory, listing can bring independence and help the AMC grow under a professional management. In practice, there's zero precedence of this happening in a government company unless there's a clear new owner," said Dhirendra Kumar, CEO, Value Research.

The five-shareholder arrangement has not worked for UTI thus far. It took more than two years for the AMC to appoint a new chief after UK Sinha left the firm in February 2011. The AMC has been unduly risk-averse. "We have lost out on acquisition opportunities and become overtly reliant on IFAs for distribution, factors which have hampered growth," said a UTI official, on condition of anonymity.

UTI MF's equity assets, for instance, have grown 117 per cent in the past six years compared with the average 333 per cent growth for the top five fund houses. UTI was the top asset manager till FY06 but has gradually slipped out of the top five.

Government shareholders have the option to offload their stake to strategic investors in lieu of an IPO. It is unlikely, however, that other state-owned banks will be interested in buying the stakes as most are grappling with NPA issues and several are in the process of shedding their non-core assets. "Selling out to private equity players is possible. But these might want a controlling stake, again leading to multiple ownership," said a second person, on condition of anonymity.

A merger with either LIC MF or SBI MF cannot be ruled out. A merger will help LIC MF to break into the big league with assets in excess of Rs 1,700 billion. At present the AMC is placed at number 17 with assets of Rs 221 billion. Another possibility, though a distant one, may be a reverse merger, wherein LIC exits the mutual fund business altogether and sells its schemes to UTI MF.

LIC's dismal track record in running its asset management business, however, may go against it. The AMC was in trouble during the global financial crisis with several of its debt schemes seeing a sharp dip in net asset values. Its joint venture with Nomura, which ended in 2016, was not a major success either. Six of its 11 equity schemes have underperformed their benchmarks in the past year, as per Value Research.

"While a merger may be beneficial, LIC MF has not demonstrated the ability to grow its AMC business and run it well in the last 29 years," says Kumar.

SBI MF, on the other hand, has shown expertise in fund management over the years and a merger will help the AMC to become the number one player with assets in excess of Rs 3,000 billion. But the marriage may not be a cakewalk. European asset manager Amundi has a 37 per cent stake in the firm, and both Amundi and T Rowe Price may not want to be partners in the same joint venture. Moreover, integrating UTI's employees, unions and the top management may be a challenge, said the person quoted above.

An email sent to UTI and the four government shareholders did not get a response.

A meeting between the shareholders is due in the coming weeks, but it's anybody's guess if a decision on the IPO or merger will materialise. While the shareholders may continue their posturing, it's the government which has to take a final call. "It does not matter if SBI MF or LIC MF merge with UTI, or there's a listing, or if the AMC is sold to T Rowe Price. The entity should be treated like an asset and should go to anyone who's willing to pay the highest price," says Kumar.