Q & A: Y H MALEGAM

‘UTI’s brand equity will be attractive if encashed now’

Y H Malegam

It has been almost a month since the Malegam Committee Report was thrown open for public debate by the Board of Trustees of the Unit Trust of India (UTI). At present, comments from the public, unitholders and employees are being considered by UTI. Sujata Mody spoke to Y H Malegam to get his views on the public perception of the recommendations made in the report. Excerpts:

What did you identify as the most critical issue while reviewing UTI’s operations?
The critical issue is that UTI has been out of the purview or supervision of Sebi and therefore doesn’t have the structure that Sebi has evolved for mutual funds—a structure that provides certain checks and balances which perhaps was not available in UTI. We thought it was important that first the UTI should be made subject to Sebi supervision, and if it was made subject to that supervision it must have an organisational structure which was same as other mutual funds. The second was that, that structure normally provides for a sponsor. There was no identified sponsor in UTI. Therefore, we have to create the concept of a sponsor. The third is that UTI’s market share has been dropping. Three years ago it had 80-84 per cent of the market share, now it has 54 per cent, and this will come down even more.

If it has to compete with the other players, it must have the ability to attract and retain competent people because the ultimate protection for unitholders is not capital or the net worth of the sponsor but efficient management, for which you need good people. This is not to suggest that UTI does not have good people. But their ability to retain those people in an expanding market is somewhat restricted. These were the broad considerations while making our recommendations.

Privatisation is a politically sensitive issue, and in the case of UTI, the fallout could be serious. What kind of political compulsions do you envisage?
Privatisation is not our primary objective. I think its just been blown up. What we had said was that you need a sponsor because under the mutual fund regulations, and particularly when you have assured return schemes, if there is a gap between the funds available and the assured return, it has to be made good by a sponsor or by the asset management company.

As far as UTI is concerned, there is no sponsor. It had a very small capital of Rs 5 crore contributed by the original sponsoring institutions. It has been substantially helped by the RBI, IDBI, and later, when the Deepak Parekh Committee made its recommendations, about Rs 455 crore was brought in by about 30-odd institutions. So there is no sponsor. While there is a public perception that UTI is a government institution, in law that is not correct. The government has basically no responsibilities.

You have a situation in which you have an institution which has Rs 50,000 crore public funds, no identified sponsor, the government is perceived to be its owner but is not. In fact, the government is perceived to be accountable but it is unfair to it because it doesn’t participate in the management. Therefore, the need for a sponsor.
Now you have three options. First, you have a sponsor who is wholly a government sponsor or, second, you completely derisk the government and have someone other than the government. Third, you have a continuance of the present situation.

The present situation is not a happy one because the government does not participate in the management but is still held accountable. So we said that if the government has to remove its umbrella, then it has to be replaced. We thought it should be replaced by a strategic partner with sufficient safeguards, like a majority public shareholding, where corporate governance would operate like any other mutual fund.

Today, UTI has only about 54 per cent market share. There are a number of assured return schemes which will mature very shortly, almost about Rs 17,000 crore in the next three or four years. If these redemptions take place and the other players increase their total investible funds, the market share might come down significantly. So, if you have an entity which has 30-35 per cent market share, why does it need to be government-owned in an industry which is primarily private sector?

There is another reason why privatisation is different in the case of UTI as opposed to other entities. If you take a public sector enterprise, there are a lot of employees. So privatisation is opposed by the employees because they have assured jobs. UTI does not have that many employees. Bulk of its operations are carried out through agents who are not employees. So there would not be the same degree of objection.

The UTI chairman has stated that a strategic partner should be roped in only if the government sought to exit from UTI completely; a revamp of the existing structure did not mandate the presence of a strategic partner. What are your views?
That is exactly what we have said. We have, in fact, discussed this whole issue and have said that if the government vacates its position, if government wants to remove the umbrella, then it has to be replaced by someone else, and one of the options is to have a strategic partner. Our suggestion has nothing to do with operational efficiency. We have made no comment regarding the competence of the present management. There is no doubt that they are very competent. What we have mentioned is that in a competitive market, to attract and retain talent, you first have to offer competitive salaries. There is a perception that people may not want to work in a government organisation or what is perceived as a government organisation because they may not have the same freedom to act. In fact, if the government was to run the organisation, we believe that it may not have the skills and, more importantly, the flexibility to run a commercial organisation.

Will a strategic partner be granted the required flexibility to run the operations, given the stakes involved and the fact that there is a lock-in period for the capital of the sponsoring institutions?
If the government vacates completely and hands over control to the strategic partner, then they may be some feeling of insecurity in the unitholders. But if government vacates gradually, then that feeling may not be there. Now, today, the government has no participation in UTI, but government-owned/controlled institutions have a role. The idea was that if 40 per cent is held by government-sponsored institutions, then the public perception of the government being a part of that institution will remain. If that is there for three years, at least, then during that time sufficient confidence will build up in the ability of that strategic partner. Thereafter they can vacate.

It is not that we want a strategic partner because UTI does not have the expertise. Why we have used the word strategic partner is because we want a financier, we want someone to take the financial risk. At the same time, we don’t want a pure financier. We want a player in the market who understands the business. It is in this context that the strategic partner comes in. Because, if you have a strategic partner you can attract talent and retain it. It is not to replace the organisation of UTI.

People have not understood why the need for a strategic partner. Today, UTI has problems with two groups of schemes. It has a problem with US-64, and it has a problem with the assured return schemes. So there may be gaps which exist or may grow in the future. Now, if UTI continues in its present form, how will the gaps be filled?
Second, UTI has a very large brand equity. It has 54 per cent of the market and a large distribution organisation. Now, if you can capture that value by sale of UTI to an outsider and the outsider pays you money for this intangible asset, then that intangible asset can be used to meet the gap. If you don’t do that and the gap persists, the government will have to meet the gap. So you are, in a way, encashing the brand equity. And, if you accept the proposition that over a period of time, UTI’s market share will drop, then it means that over a period of time the value of its brand equity will also get reduced — so if you don’t encash it now, you won’t be able to encash the same amount in the future.

Has any party evinced interest to participate as a strategic partner?
We are not involved in this. But a number of people have been wondering whether the government will allow such a thing to happen.

There is certainly value in UTI’s brand equity. Why it would be attractive to a strategic partner is because in any industry you can either grow organically or inorganically. All mergers/acquisitions take place because you want to grow inorganically. And in a dynamic situation, you would grow much faster inorganically than organically. Second, there is a lot of synergy. If you have your own mutual fund and if you have access to UTI’s investor base—they have got four crore unit accounts—you have a large marketing organisation. So immediately for your own schemes also you have access to those people. Hence, if the strategic partner comes in, he would pay value not merely for the profit he would make out of UTI’s operations but also the additional profit he would make on his own operations.

In my view, this is an attractive proposition if encashed now. The choice before the government is either it encashes the brand equity now and uses this money to bridge the gap or it doesn’t encash it and carries the liability of bridging the gap itself. The third alternative is that the government might say that it is not responsible for the gap. In this case, the unitholders will have to bear the burden. There is no other way this can be done.

Theoretically, in the case of any transaction, the valuer will put a value on the intangible assets and a value on the contingent liabilities. If the value of intangible assets exceeds the value of the latter, he will pay a premium in addition to the book value of the assets. If the value of the contingent liabilities is more than the value placed on the intangible assets and there is still a gap, then whoever is selling will have to make good that gap. Obviously, if you put a value on the intangible assets then the amount which you would need to contribute will be much smaller. So, if you believe that the brand equity of UTI will increase in the future, then you delay the sale. But if you believe that with competition and so on, the brand equity of UTI will fall, then it is better to encash it now.

Based on the feedback and public discussions, do you see your recommendations getting implemented?
We deliberately took the view that we were not going to make recommendations with the consideration of whether they will be accepted or not. Because if you start of with that proposition, you don’t make rational recommendations. So we have proceeded on the basis that we make the recommendations and give a rationale for them. If you see our report, there is a chapter on ‘Issues for consideration’ which discusses why we have made these recommendations. Now views can differ. If one agrees with what we have stated, then I think the conclusions will follow. If the recommendations are rational but not politically possible, then that is a different situation. I wouldn’t like to speculate on these situations.

I read that the chairman said that individual unitholders do not favour this. If he has got that feedback, then that’s a different issue. The way I look at it from an individual unitholder’s point of view is—if the government says yes we are the sponsor and will accept the responsibility of a sponsor, then there is protection. If the government is not willing to say that then there is a risk to the unitholder.

Now in the situation of risk, if there is a strategic partner who is reputed and there is a fairly large capital, much more than an AMC normally has (we have asked for Rs 1,000 crore), that itself will give some protection to unitholders. So their protection will be the fact that there is a strategic partner, and that there is an AMC which has a capital of Rs 1,000 crore, that the strategic partner is a reputed, competent individual, that the funds are better managed, and the fact that at the time of takeover, he will bring in a premium that will reduce the gap. And even if the government doesn’t bear it, the contribution which the unitholders will have to make will be lower because the gap will be smaller.