If even four PSU banks/FIs can’t be made to obey Sebi’s rules, what does it say for the government’s ability to get things done?
There are several strands to US asset management firm T Rowe Price’s—T Rowe Price has $1.12 trillion of assets under management—running dispute with the Indian government over control of UTI mutual fund, but two are especially relevant right now.
First, in the context of the government wanting to lower its stake in various PSUs to less than 51%, the UTI case makes it clear this doesn’t make an iota of a difference. Second, the fact that the market-regulator Sebi hasn’t been able to enforce its writ on four governnment-owned banks/financial institutions makes it clear that regulation
doesn’t mean much when the government decides it doesn’t want to adhere to them. Neither is good news from the point of view of restoring investor confidence in the economy. There is, in addition, a recent CAG report that points to event the Union Cabinet having a limited writ when it comes to making the system perform—that includes the bureaucrats, the regulators, the courts etc—but this is something we will come to later.
Let’s first deal with why the government reducing its stake to below the controlling level of 51% is irrelevant. While this is being contemplated to reduce the government’s control over them which, in turn, will allow these PSUs to operate freely, the government has no direct stake in UTI, and yet it controls it absolutely! While T Rowe Price owns 26% of UTI, three banks—SBI, PNB and Bank of Baroda—and LIC own 18.25% each; this gives the government effective control even though UTI is not even a PSU. In 2011, barely a year after the government sold a stake in UTI to T Rowe Price to professionalise the mutual fund, the finance ministry was trying to foist its nominee—the brother of the advisor to the then finance minister (bit.ly/36t7cLO) who had no experience in the financial sector—as the head of UTI. It was T Rowe Price’s 26% shareholding—this is a critical level in Indian company law as it allows the stakeholder to block certain actions by the board—and a professional board of UTI’s trustee company that allowed this to be beaten off. The battle, though, took its toll as UTI remained headless for around two years as a result.
After the US-64 fiasco, when UTI was divided into ‘good UTI’ and ‘bad UTI’, the four PSUs were asked to buy a stake in the UTI mutual fund. Since Sebi rules don’t allow anyone who runs a mutual fund—a ‘sponsor’ in jargon—to run another mutual fund, and all four have their own funds, they were allowed a special exemption. Sebi, however, came out with guidelines on “avoiding conflict of interest between UTIMF and the sponsors”; so, for instance, sponsors were not allowed to “nominate any employee working with them on the Board of the AMC and the trustee company or any committee of the UTI Mutual Fund”.
It is this professionalising that the government used to convince T Rowe Price that UTI would be run as a board-managed firm; T Rowe Price’s 26% stake came from the four PSUs diluting their stakes accordingly. Despite the government’s assurances and Sebi’s guidelines, the four PSUs continued to try and interfere in UTI’s running; eventually, in March 2018, Sebi said the four PSUs would have to reduce their stakes in UTI to 10% within a year, in keeping with the rules for all other sponsors with more than one asset management company (AMC). The shadow boxing, however, continued and, at different points in time, both SBI and PNB attempted to wrest control of UTI leading to, in August last year, T Rowe Price filing a case in the Bombay High Court against the government; T Rowe Price asked it to prevent the four PSUs from scuttling UTI’s IPO.
The IPO was critical since it would allow the four PSUs to dilute their stake to the Sebi-mandated 10% at a market-determined price and, since T Rowe Price had also agreed to, under certain circumstances, cut its stake to below 26%, it would pave the way for a genuinely board-managed UTI where no single shareholder controlled the board; though the fact that the four PSUs acted as one—and took orders from the government—made it always likely the government would call the shots if T Rowe Price’s stake fell below 26%. Indeed, ahead of the IPO, the finance ministry tried to push for a small IPO—of, say, 5-10% of the equity, contributed equally by all five shareholders—ostensibly to test the waters. What this would do, however, was to reduce T Rowe Price’s stake to below 26% and, with the majority voting rights with PSUs, the government could then again try and foist its nominee as the UTI chief!
While a supposedly independent Sebi didn’t enforce its rules in March 2019, it has now extended this deadline to December 2020; whether more extensions will be given is unclear, but it shows how limited Sebi’s writ is when it comes to the government or PSUs. Given this, now that talks of an IPO have once again gathered steam, what is the guarantee that the four PSUs will not act in concert—at the behest of the government—even when their individual stakes are at 10% or below? With no permanent CEO since Leo Puri left last year in August, and the chances of a truly independent UTI still bleak, it is possible the IPO will get impacted. Till UTI is genuinely board-managed, it is unlikely T Rowe Price which has $1.12 trillion in assets under management will ever raise money from its investors for UTI to manage; the big advantage of getting T Rowe Price as a sponsor, amazingly, has never been tapped due to the PSUs trying to muscle it out.
The CAG report on PSUs is even more worrying as it confirms the government is quite blasé when it comes to following rules. The chapter on disinvestment notes that, for several years now, the government has been meeting its targets, but this has come with very poor retail participation and with little genuine strategic sales. In FY18, the CAG points out, the cabinet approved 24 PSUs for strategic sale; all were to be completed by June 2018, but only one could take place, and that too was one PSU (ONGC) buying another (HPCL), for Rs 36,915 crore.
While Sebi had mandated, in 2015, that all listed firms must have a public float of 25%, by August 2017, PSUs were given an extra year for some reason—but 17 PSUs have still not complied. The finance ministry—not Sebi—has now extended this to August 2020. And, more than a decade ago, in October 2009, the cabinet said that all unlisted, but profitable PSUs would be listed; but only 59 of 90 PSUs that satisfy the criterion are listed. Apart from the fact that large amounts of public funds could get freed up via listing, this shows that even the cabinet’s writ is limited. To talk of sweeping economic reforms in such a situation seems a bit of a bad joke.