Hurting investors, from UTI to Cairn

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Published: July 23, 2018 3:15 AM

For several years now, US investor T.RowePrice (TRP)—it holds a 26% stake in UTI—has been fighting a pitched battle with UTI’s PSU shareholders over the need to run the mutual fund in a professional manner.

Sebi rules make it clear PSUs are running amok at UTI, and Cairn’s shares are being sold even while arbitration process is still on.  (Image: Reuters)

For several years now, US investor T.RowePrice (TRP)—it holds a 26% stake in UTI—has been fighting a pitched battle with UTI’s PSU shareholders over the need to run the mutual fund in a professional manner. Even Sebi regulations make it clear the PSUs—SBI, LIC, Punjab National Bank (PNB) and Bank of Baroda (BoB)—can’t be behaving in the manner they are. Indeed, the rules talk of them needing to dramatically lower their stake by next March, but the finance ministry refuses to step in to resolve the issue—at stake are the interests of 11 million shareholders, lakhs of pensioners, Rs 3.6 lakh crore of UTI’s corpus and India’s reputation as a safe place for global investors.

The treatment meted out to Cairn Energy, which should infact be feted for its efforts in finding new oil—it now produces a fourth of India’s oil output—is even worse. After Pranab Mukherjee’s infamous retrospective tax, the UPA government hit it with a $1.6 billion tax demand. Though the BJP’s election campaign focused on the UPA’s tax terrorism, it didn’t remove the law when it came to power; as a face-saver, finance minister Arun Jaitley said he would respect what various courts of law ruled on individual cases. Even if you ignore the fact that the government tried to delay the global arbitration, the taxman has seized Rs 1,106 crore of dividends due to Cairn Energy from Vedanta, it didn’t allow Rs 1,594 crore of capital gains tax refunds and, after seizing $1 billion worth of Cairn’s shares, it sold off 40% of these and is now planning to sell off the rest, even as the arbitration is going on.

Why the government is behaving in this manner is not clear, but this is hardly any way to welcome investors or even reassure them of the government’s good intentions. Hardly surprising then, that India has not seen too many really big foreign investments in the manufacturing sector since Narendra Modi was sworn in; the biggest ones are in e-commerce which, interestingly, are technically illegal since the government does not allow foreign investment in the retail consumer space. Should the government want to woo FDI in a serious manner, this approach cannot possibly carry on.

The UTI story began in 2003 when, in order to bolster confidence after the US-64 collapse, the government brought in LIC, SBI, PNB and BoB as shareholders. Since each one ran their own mutual funds, the Joint Parliamentary Committee (JPC) set up to inquire into US-64 was against this, but said that, if there was no other option, the “inherent conflict of interest as regards these institutions” had to be taken care of. Sebi then came out with various rules and regulations to ensure this. Among others, it said the PSU firms couldn’t nominate their employees as directors on the Asset Management Company’s (AMC) or the trustees’ board—the trustees are ultimately responsible for the mutual fund’s running—and that there had to be Chinese walls between the sponsors and the AMC. And, earlier this year, Sebi came out with even stronger rules preventing anyone running a mutual fund from owning more than 10% in another—each of the four PSUs own 18.25% in UTI—and the rules have to be complied with by next March.
What’s happened despite these rules, however, has been the exact opposite. In 2011, the finance ministry, under Pranab Mukherjee, tried to foist its nominee as the head of UTI. While this was foiled, LIC has since tried to take over UTI and, at one point, as FE reported, both LIC and SBI wrote to the board of the UTI AMC asking it to allow the term of the current MD and CEO, Leo Puri, to expire and to appoint a non-executive Chairman from among the “independent directors”—only the nominees of the PSUs are considered “independent” since TRP’s nominees clearly do not fall in this category.

While writing to the AMC’s board is enough to make it clear LIC and SBI have the “inherent conflict of interest” the JPC warned against, TRP has written to Sebi citing proof that LIC’s nominated director had a financial relationship with it and was, therefore, not “independent” as was required by the law. But, even if you ignore TRP’s allegations, which LIC has denied, surely it is in the interests of everyone if there is a broad-based IPO since this will allow market-discovery of UTI’s worth, based on which, LIC, or anyone else, can make a bid to take over it. Yet, for a long time, the finance ministry was pushing for a small IPO—this would allow the government to install its CMD since, with a stake below 26%, TRP couldn’t oppose this under Indian law! By the way, if the PSUs continue to vote together even after they lower their stake to 10% each, UTI will never become a professionally run firm.

When the government knows Parliament—as represented by the JPC—was against LIC/SBI/PNB/BoB buying into UTI because of the “inherent conflict of interest” and when Sebi has made it clear they have to reduce their stake to below 10% each, how can the government sit by and allow these board-room games to continue? Indeed, the trustees’ board, which is responsible for the running of the mutual fund—even a cursory reading of Sebi’s mutual fund regulations makes this clear—has reiterated the need for the PSUs to lower their stake and pointed to the fact that not having a CEO/MD will adversely affect the proposed IPO. The government may have won Parliament’s trust vote due to its numbers, but winning the trust of investors will need some genuine action.

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