Mumbai: India’s third largest mutual fund by assets under management, UTI Asset Management Co. Pvt. Ltd, or UTI AMC, wants to acquire a fund house using proceeds from the planned sale of a 26% stake to a strategic investor.
The stake divestment plan has met with strong reservations from State Bank of India, the country’s largest lender and one of the four promoters of UTI AMC. According to a senior State Bank of India executive, who didn’t want to be named, an asset management firm typically requires a low capital base to run its business and does not need to raise funds through a stake sale.
Contrary position: The State Bank of India headquarters in Mumbai. Sebastian Di Souza / Bloomberg
While UTI AMC indeed doesn’t need to raise capital for its existing business, it needs additional funds to acquire a domestic asset manager with about Rs5,000-7,000 crore under management, said a senior official from the mutual fund, who also didn’t want to be named.
Besides, it wants to use the funds for the private equity and venture capital business of its Bangalore-based subsidiary, UTI Venture Funds Management Co. Pvt Ltd, this official said. UTI Venture Funds is one of the older private equity institutions in India, which counts Koutons Retail India Ltd, Zylog Systems Ltd and Ramkrishna Forgings Ltd among its portfolio companies.
UTI AMC wants to diversify and raise the size of assets under management aggressively by acquiring another fund house to remain competitive in a challenging environment, according to the UTI AMC official.
The Indian mutual fund industry has lost one-fourth of its assets since September after the end of a five-year bull rally on the stock markets.
The minimum net worth requirement for an Indian asset management company, established as a trust by its sponsors, is Rs10 crore in case there is at least one domestic sponsor. A firm’s net worth includes equity share capital, preference share capital, share premium and reserves. A fully foreign-owned mutual fund house requires $50 million (Rs245 crore).
UTI AMC, which managed funds in excess of Rs42,500 crore as of end-December, is a stand-alone fund house in an industry dominated by asset managers with strong institutional or corporate backing.
Some of them include Reliance Capital Asset Management Ltd, HDFC Asset Management Co. Ltd, ICICI Prudential Asset Management Co. Ltd, Birla Sun Life Asset Management Co. Ltd and SBI Funds Management Pvt. Ltd. These houses and UTI AMC account for at least 60% of the Rs4.13 trillion funds managed by AMCs as of 31 December. There are 36 AMCs operating in the market.
UTI AMC was carved out of the country’s oldest mutual fund, the erstwhile Unit Trust of India, in February 2003. Life Insurance Corp. of India Ltd, Bank of Baroda, Punjab National Bank and State Bank are its promoters. Beside owning UTI AMC, these four entities run their own mutual funds.
According to people familiar with the development, State Bank wants to buy out UTI AMC, but the proposal has not found favour with the government.
The funds business has been hit hard in the last few months, with the liquidity crisis that began with the collapse of Lehman Brothers Holdings Inc. in mid-September forcing investors to flee some categories of debt funds. The crisis hit equity funds as well, with India’s benchmark equity index, the Sensex, plummeting 52% last year.
The liquidity crisis brought some of the smaller fund houses to the brink of collapse. At least one fund, Lotus India Asset Management Co. Pvt. Ltd, was taken over by Religare Enterprises Ltd in early November. The situation has improved since then, but analysts now expect the industry to consolidate.
Early last year, Infrastructure Development Finance Co. Ltd acquired Standard Chartered Asset Management Co. Pvt. Ltd for about Rs830 crore, valuing the company at around 5.67% of its assets under management. Dutch firm Robeco bought a 49% stake in Canbank Investment Management Services Ltd, also last year, valuing the AMC at 10.7% of its assets.
According to Hemant Rustagi, chief executive officer of WiseInvest Advisors Pvt. Ltd, an investment advisory firm, the valuation of an AMC is related to the asset mix as well as the market sentiment. “Typically, the buyer would pay 4-7% for the equity assets, 2-3% for the medium and long-term debt assets, and practically nothing for the liquid assets,” said Rustagi.
UTI AMC had early last year filed a draft offer document with markets regulator Securities and Exchange Board of India to raise funds through an initial public offering, or IPO. The plan was to do a pre-IPO placement with strategic investors and bring down the four existing promoters’ stake to 51% after the IPO. However, the meltdown forced UTI AMC to shelve the IPO plan.
Instead, it decided to offload a 26% to private equity investors. It has shortlisted three prospective investors and a deal is likely to be struck by end-March.