While the government and T.Rowe Price (TRP) negotiate a possible truce after the US investment firm went to court, UTI’s managing director has made it clear he plans to leave when his term is over on Monday. He speaks to Chirag Madia about the fight and the likely way ahead. Excerpts:
What does the fight between the US investor T Rowe Price and PSUs say about the investment environment in India? Will it not discourage investors from putting their money in India?
I can’t comment specifically on this situation. But, India is an attractive destination because of its macro-stability, strong fundamentals and good growth prospects. Over the past two decades, we have had pro-reform governments that put FDI at the policy centre stage. But every now and then, when misalignments occur, it becomes the duty of all concerned including policymakers to quickly resolve these. One will always have complicated situations arising; what matters is how quickly and swiftly they are dealt with. I expect the misunderstanding here to also be dealt with quickly.
Your term comes to an end in a day or two. If TRP gets a stay in the court, will you continue as MD with a divided board?
As a professional CEO, it is not possible to function effectively unless there is very a clear mandate and undivided support. Therefore, I have made it clear that I wish to leave office on the day my terms ends, which is August 13. I have made it very clear that I am not seeking extension. All the relevant stakeholders are aware of my decision in this regard. The institution is in very strong financial health, the team and management are strong and united at this time, and the institution will continue to do well. I am also confident that stakeholders will quickly resolve the issue that has arised and move ahead very quickly.
I can’t exactly predict the change that will happen, but my personal view on where the solution lies is clear for some time now—there is a fair amount of consensus that the right solution for UTI is to become a listed company. It needs to be managed by an independent board, with an independent chairman of public repute.
When TRP came to India in 2009-10, it was felt it would bring in a lot of money from global clients and invest in India. But that never happened. Why?
I was not party to that agreement. But I have to say that T Rowe Price’s contributions to UTI have been important on a number of dimensions. They have bought tremendous experience and very responsible governance to the board of UTI, they have played an active role in strategy and have also been helpful to the company in terms of best practices in a number of areas, in particular the investment management process. They have shared their understanding on technology, on compensation practices and they have helped our international business, introducing us to global clients. Yes, we might not have got a mandate to manage the money from T Rowe Price, but they have been an extremely valuable partner.
If TRP is not going to bring in more funds from global clients to help UTI grow in a big way, why should the PSUs be asked to cut their stake in UTI? Is that fair since it will give TRP control of the fund with a very small investment?
Conflict of interest guidelines are Sebi-regulated and have nothing to do with T Rowe Price. Sebi mandates that if you own and sponsor one AMC, you should not be playing a role in the management and ownership in another beyond a certain point. So, it is not T Rowe Price but the regulator that has asked that this be brought into place.
I would not like to comment on their investment as that is an agreement that was entered into before I become CEO, and it was voluntarily entered into by all five shareholders. Once the agreement is contracted, it is something that should be honoured. I think, by and large, all the shareholders have equal rights under that agreement. I am not sure that T Rowe Price has rights that are unique to it.
TRP wants the PSUs to lower their stake to 10% each—as per SEBI rules—and it will have 26%, and reports say it is open to reducing this if need be.
If TRP is at 20%, the PSUs can vote together and the government can put its nominee as CMD, as it tried to in 2011. So how is a settlement going to work? I can’t comment on a hypothetical situation. Is the trustee board superior to the AMC board?
Under the MF regulations, the trustee’s board is essentially given power by the Sebi to ensure that mutual fund regulations are honored. To that extent, the AMC is appointed by the trustee board, and all matters related to compliance with MF regulation and the Investment Management Agreement must be aligned with the trustees; so, it isn’t a matter of superior or inferior.
The trustees want you to get an extension, they want an IPO and they want the PSUs to lower their stake to 10% each. Why is the AMC board not accepting this?
I don’t want to comment on specifics, but I think the trustees roles is to ensure there is compliance with regulations, and to that extent, the AMC must comply with regulations. The general principle is that any AMC will comply with the trustees’ directions, which are intended to comply with mutual fund regulations.
I think our trustees have been very honourable, principled and have taken a professional view of their reasonability to essentially ensure that UTI AMC should remain compliant, and they have acted keeping that objective in mind.
The PSUs have said that your performance as UTI’s MD has not been good. Your reaction.
I am not sure whether they have said it or not. But it is not true. On a consolidated basis, we have a PAT growth of 18%, which is in line with HDFC that has just listed. We maintain the second-highest margins in industry, behind only HDFC. We have grown our AUM with a 21% CAGR for four years and group assets under management have grown at 33%. So, we are very strong company that has total consolidated assets of Rs 3.7 lakh crore. We would estimate profits in the range of Rs 500 crore this year, and we have maintained industry-leading margins during that time. There was no CEO for two-and-a-half years, so the company faced a break down … today, we have a very clear direction and have built an AMC company which is strong in mutual funds, pension business and international business.
Despite being one of India’s oldest fund houses, you have been beaten by many others and steadily lost market share. Why?
If we have grown at 21%, maybe, the industry might have registered a growth of 24-25%. Yes, we have grown slower, but this has been UTI’s challenge for the last 15 years. There are several factors here. One is a structural shift, where five bank-owned AMCs, thanks to their captive distribution and strength, have gained a 12-15% market share over the last six or seven years. For example, in FY10, they had 40% of equity, which had risen to 55% in FY17, because they own the distribution. If we look at UTI’s performance on growth in the non-bank AMC segment, we have done as well—if not better—as the markets.
Our sponsors have done very little in that regard as they run their own AMC, and that is the central issue. SBI has no interest in UTI, it sells its own fund at its branches; PNB and Bank of Baroda have their own mutual funds, as does LIC. Point is, they are really not interested in UTI, they are not its promoters, they were temporary custodians brought in by the government, they didn’t create this institution, they have no role in building it, they have done nothing for it. They are going to get a bonanza if we list today, and get 10 times their money—much more than the ROEs they generate on their own businesses.
Your predecessor UK Sinha, who was also Sebi chief, has said India has one of the most expensive mutual funds in the world. Your reaction. And why is India so expensive?
I respectfully don’t agree with the view that are we are an expensive market. In fact, I think we are a highly competitive market that offers very good value in terms of both alpha and fees to retail investors
With Aadhaar KYC and epayments also much simpler, how will distribution of mutual funds change? And do you need the elaborate branch/dealer networks of the past?
I think this is something which works well for UTI because we are a retail-focused institution, and we are a strong advocate of e-KYC. With financialisation in the economy, you will see much broader outreach to retail investors. This will happen in the beyond-30 (B-30) markets, some of which will be technology-led. Some might need new distributors to join the industry as they play important role as the first step for people to come in the industry. We will see very good growth in folios as technology and KYC changes comes into force. However, one will still need branches and points of physical presence remain important.