M. Damodaran, Chairman, UTI: Mean street blues

If Damodaran puts UTI's strategic holdings on the block, it will be open season in India Inc. Cash-rich predators will make a quick lunch of weak promoters

The first week of September was unusually hectic for Meleveetil Damodaran, the 55-year-old Chairman of the Unit Trust of India. On the one hand, Damodaran had to work out the intricacies of a bail-out package for the ailing fund and, on the other, rally morale within. Now, Damodaran can heave a sigh of relief-for a few months at least.

Last fortnight, the Finance Ministry approved a Rs 14,561-crore bailout package-the third since the start of UTI's crisis in June, 1998, when the reserves of its flagship US 64 scheme turned negative-for the mutual fund giant. What's come in tow this time around is a financial and structural revamp plan, which involves splitting UTI into two: UTI-I, consisting of US 64 and 21 other assured-return schemes, plus sus-99 (Special Unit Scheme, created as part of January 1999 bailout), with an asset base of Rs 25,000 crore, and UTI-II, comprising 49-odd NAV-based schemes, with assets of around Rs 17,784 crore. While the close-ended schemes of UTI-I will be phased out, UTI-II is to be nursed back to health and then privatised.

The tricky part for Damodaran and his bosses in North Block will be in putting the plan to work-not because it is unworkable but because a key component needed to make it work is politically explosive. While approving the restructuring plan, the government asked UTI not to "asset bleed"-in other words, not sell any of its crown jewels such as investments in ITC or L&T to any strategic investor. But that's something Damodaran has no choice but to do if UTI is to turn around. For, US 64's current net asset value (NAV) is Rs 5.97 per unit, whereas it has assured payment of Rs 12 a unit to investors who hold less than 5,000 units and Rs 10 per unit to those with more than 5,000 units. So, despite the government's generous doles of Rs 6,000 crore for US 64, and Rs 8,561 crore for meeting the liability on assured returns schemes, UTI will need to maximise value from its investments.

If Damodaran does put UTI's strategic equity holdings on the block, it will be open season in corporate India. Cash-rich predators will make a quick lunch of weak promoters; foreign companies will find an easy way right into the heart of India Inc., and even bold professional managements, with some help from private equity funds, would attempt to buy out their employers. For Damodaran, then, it's damned if you do, and damned if you don't. Says he: "Between the investor and the incumbent management (of companies in which UTI has strategic holdings) I would bat for the investor. Even if it's batting like Sanjay Bangar and not like Ganguly or Tendulkar.''

The government, in fact, would like Damodaran to play defensive. The ministry's argument for soft-pedalling "asset bleeding" is that the government is committed to bailing out UTI and, therefore, there's no need for UTI to sell its key holdings. The real reason, however, is that the government is loath to lose its supporters in corporate India. For, strategic sale would mean invitation to predators, not all of whom will be Indian entities. Points out a Mumbai-based investment banker: "The reality is that a weak government at the Centre is buckling under pressure from powerful corporates." In other words, protecting corporate India at the cost of ordinary investors.

Rocking The Boat

Supporters of the government's decision would like to point out that UTI is free to sell its holdings in the open market. But there's a big difference between selling to a strategic investor and selling in small lots over a long period of time. And the difference is in the money. A strategic investor will be willing to pay a premium over the market rate. A direct market sale, in the case of an operator like UTI, will necessarily drive prices down and could even lead to overall losses in the value of the investment.

Consider the following cases. Between August 23 and September 5, 2002, Nestle SA is reported to have mopped up around 24 lakh shares of its Indian subsidiary as part of its strategy to hike stake through the creeping acquisition route. The block deals are believed to have been done at Rs 570 to Rs 590 per share, significantly higher than the then prevailing price of Rs 525. UTI owns 57.92 lakh, or 6.01 per cent, in Nestle India, and did sell about 11 lakh shares. Had it been able to strike a block deal with Nestle SA, UTI could have earned Rs 26 crore in premium alone. And Nestle isn't the only mnc where UTI owns shares. Top-notch companies like BASF, GSK Pharma, and Novartis are some others in its portfolio.

And when UTI does enter the market, the prices invariably fall. Take the case of Infosys. In March 2001, UTI's stake in Infosys was 8.38 per cent, or 55.46 lakh shares. By July 31, 2002, it was down to 4.36 per cent (27.90 lakh shares), which means in the interim UTI had off and on been selling Infy shares to meet its redemption pressures. But did UTI get the highest price? Unlikely. For, between March 2001 and July 2002, Infy's stock price fell from Rs 5,500 to Rs 3,600 or so. And depending on how much UTI sold and when, its average price realisation would vary in that range. But it certainly won't be closer to the top range. Notes Dhirendra Kumar of Value Research, a mutual funds research agency: "In its fight for survival, the trust should derive maximum value for its crown jewels, even if it means creating upheavals in corporate boardrooms.''

On the face of it, the argument is impeccable. Take the case of ITC. UTI holds 11.87 per cent in the tobacco giant, and bat, which is the single-largest shareholder with 32.50 per cent, has been trying desperately for years now to get control of the Indian company. Given that tobacco is not an industry where the government wants foreign investment, it may not allow a sale to bat. But it could very well allow UTI to sell it to another investor (a white knight from ITC's point of view).

UTI: A HISTORY OF BAILOUTS

1998-99 BAILOUT PACKAGE: Rs 3,300 crore against the transfer of PSU stocks to special unit scheme (SUS) created for the purpose. OUTCOME: Recommendations of the Deepak Parekh Committee remain unimplemented. There is mismanagement of funds and need for another bailout. JULY 2001 BAILOUT PACKAGE: US 64 liquidity package, whereby government assures repurchase of upto 5,000 units at a price increasing upto Rs 12 on May 31, 2003. Rs 10 is guaranteed to those investors with more than 5,000 units each. OUTCOME: US 64's NAV is announced in January 2002. With the NAV at around Rs 6, there's a huge hole in the assured repurchase price and thee NAV of US 64 units. Besides assured return MIPs have a shortfall of Rs 8,561 crore. UTI needs yet another bailout. SEPTEMBER 2002 BAILOUT PACKAGE: Rs 14,561 crore package and bifurcation of UTI, with UTI-I covering US 64 and assured returns schemes and UTI-II covering the NAV-based schemes. UTI-II to be privatised at a later stage. OUTCOME: If UTI is to avoid another bailout package next year, there will have to be a fixed timeline to sell UTI-II. Also, UTI's assets quality needs to be shored up.

There are other companies like L&T where UTI owns more than 10 per cent. If the fund were to sell its stake to the A.V. Birla Group for Rs 306 a share-the price at which group company Grasim bought 250 lakh l&t shares from Reliance early this year-then it would bag Rs 814.60 crore. There's a hitch in that the Group Chairman Kumar Mangalam Birla has said there are no plans of buying the L&T shares from UTI and following it up with an open offer. But there are other investors on the prowl-like Lafarge of France that bought Tata Steel's cement plant in November 1999-looking for consolidating their market share in the cement industry. Lafarge was unavailable for comment.

Some analysts believe that a strategic sale isn't the only way to maximise UTI's price realisation. Sale to private equity funds, or even secondary American Depository Receipts (ADR) issues are some other options. Besides helping UTI unlock the value, the management will get access to capital in foreign markets. Says a Mumbai-based investment banker: "UTI could adopt this route in the case of public sector undertakings." UTI holds 3.67 crore shares of HPCL, 1.85 crore shares of Shipping Corporation of India, 3.34 crore shares of Nalco, and 2.91 crore shares of MTNL.

The least of UTI's problems is UTI-ii. Almost all the private sector mutual funds are willing to make out a cheque for it. Says a mutual fund manager: "UTI can command a premium because of the retail base." That apart, some funds may be keen to get their hands on good quality loan portfolio. Also, since UTI-ii constitutes a quarter of the fund's total assets, there won't be any resistance from corporate Indian to its privatisation.

The immediate challenge for Damodaran, however, is to overcome resistance to the sale of UTI's crown jewels. Or, at least, make smart Nestle-like deals. Investors are watching.