No micro-managing, please

Even as the drama on the Ambani front was playing out all of last month, another was unfolding, this time within the boardroom of the ?private sector? UTI Bank.

The board first decided to push through a decision to split the post of chairman and managing director, something which effectively would have seen PJ Nayak, the current CMD, exiting from the bank. But just a week after that December 15 board meeting, the board decided not only to revoke its own decision on splitting the post, but also gave Dr Nayak a fresh five-year term.

The U-turn at UTI Bank?where the government, through UTI-I, Life Insurance Corporation and General Insurance Corporation holds 53% stake?throws up several issues and some unanswered questions. Dr Nayak, who took over as CMD of UTI Bank in January 2000, is widely seen as the driver behind the bank?s growth and solidity. A seasoned former bureaucrat, Dr Nayak?s leadership at the bank has been peppered with the right degree of aggression and caution. The key issue which had been agitating the board members of the bank?including its principal shareholders?has been the one on capital-raising. UTI Bank?s management wanted an overseas issue to raise capital, while the government-owned shareholders, led by UTI-I, preferred otherwise, and even favoured a rights issue where the government shareholding wouldn?t fall below the existing level. Apparently, the bank also tried a compromise formula, suggesting a preferential offer to the government shareholders with the overseas float to keep their holdings intact.

The reasons why the bank felt an overseas issue was required aren?t hard to seek. One, the bank felt this would bring the possibility of getting a premium pricing at the market, since the overseas market would look at the possibilities of future earnings. Second, an overseas issue typically adds to the ?currency? of the share in the global market, and helps in building awareness about the issuer and the brand. At a time when the bank is keen on looking at international operations, this would come in handy. The bank felt that a domestic float would not get that kind of pricing. The government shareholders, on the other hand, made it clear (including in conversations with me) that their mandate was to protect the government?s shareholding and the overseas float was therefore not a good option.

The heartening aspect of the UTI Bank story is that most of the independent directors on the board decided to stand up and be counted. One of them, former Sebi board member Jayanth R Varma, even threatened to resign at the December 15 board meeting, since there was a move to co-opt an LIC nominee on the board, something which would have violated clause 49 of the listing agreement, which mandated a 50% independent director representation on the board. This apart, most of them also backed Dr Nayak?s continuance.

Evidently, the government seems to have done a rethink thereafter, and the decision on the CMD?s post was reversed. The capital-raising is the next key issue which will now need to be decided upon. The bank is now believed to be in a heightened state of readiness for an overseas float, should UTI-I and the other institutions allow it to go through.

Yes, it is true that the government is a majority shareholder in the bank. But it?s also true that the bank flourished owing to its independent management. The private sector nature of UTI Bank needs to be protected, if the government is to preserve the bank?s identity, particularly when it is now poised to go to the next level of growth. The independence of the management and the board need to be strengthened, not reduced by actions like the ones which were about to be taken on December 15. This, of course, is assuming that the government doesn?t view UTI Bank as another sarkari entity. If the bank?s valuation rises, the government too will stand to gain (even with relatively lower shareholding), and an obsession with retaining the existing shareholding level in what was clearly supposed to be a private sector bank may not be a good idea. Worse, it will also send out totally wrong signals to the investor community in India and abroad.

In the interests of corporate democracy and the independence of the bank, it?s best the government stays off micro-managing its affairs. The government would do well to remember that shareholder value is directly related to good corporate governance.