Mumbai: Eight years ago, the Indian government convinced four state-owned financial institutions to step in and own equal stakes in UTI Asset Management Co. Pvt. Ltd (UTI AMC), carved out of Unit Trust of India, the country’s oldest fund manager, that was crumbling under the burden of assured return schemes.
On Monday, the asset manager announced the sale of a 26% stake to US-based asset manager T Rowe Price Global Investment Services Ltd.
U.K. Sinha, chairman and managing director of UTI AMC, termed this as the second milestone for the company. In an interview, Sinha said that the fund will not get money from the share sale but it will bring business and help UTI AMC’s growth.
Setting milestones: UTI AMC chairman and MD U.K. Sinha. Ashesh Shah / Mint
He also said that the regulator’s decision to remove the entry load for mutual fund investments from 1 August has dealt a blow to the industry which has seen negative sales between September and November. Edited excerpts:
You are at the helm since 2001. How has the journey been?
There was a crisis with UTI in 2001 and the government had to assure our investors that everything would be alright. The group was bifurcated into UTI AMC and Specified Undertaking of UTI. Those schemes that did not offer assured returns were transferred to UTI AMC. The government invited four financial institutions to be our sponsors—State Bank of India, Life Insurance Corp. of India, Punjab National Bank and Bank of Baroda.
The government was aware that these four entities did have their own mutual fund businesses and there could be a possible case of conflict of interest. But the philosophy which went in favour of these entities was that the government wanted to assure the investors that although it was withdrawing from ownership, four strong institutions would be backing the business of UTI mutual fund. Though these four entities had 25% stake each, the regulator issued a statement saying that these four shareholders would never have a say in our management decisions. So, this was purely a temporary affair.
Didn’t you plan to hit the capital market with an initial public offer?
Yes, we had planned an initial public offering (IPO) and a pre-IPO placement of 20% to provide an exit to these sponsors. These issues got delayed due to bad market conditions during the first half of 2008 and the finance ministry suggested in September that we should find a strategic partner for a 26% stake since the process of IPO was delayed.
What made you choose T Rowe Price?
About 30 firms were shortlisted and we looked into three entities after months of analysis, expression of interest and feedback. After an intensive exercise with these three entities, we selected T Rowe Price. While selecting the partner, it was very clear with the board that no money was coming to the company. This deal has been done to allow the existing shareholders to reduce their stake.
What do you gain from the deal?
The mandate given to us by the government for this deal was that there should be a lot of business and cultural synergy, and business growth should be the guiding principle for this tie-up.
T Rowe Price is the fourth largest asset management firm in the US with assets under management of close to $400 billion. They are pure asset managers and already have major investments in India. So, one advantage is that their investments in India will now happen through us. For instance, UTI mutual fund can now raise a fund in India that would be managed by T Rowe Price. The strength of T Rowe Price will help us to raise more money.
It can also help us managing the portfolio of our $50 million offshore fund—UTI India Offshore Fund. Similarly, we also have a strong $30 million Shariah fund portfolio, where T Rowe Price will be able to help. Essentially, this tie-up will give us a business synergy.
Secondly, T Rowe Price also has a strong technology and research team globally and we will benefit from this.
What role will T Rowe Price play in managing UTI AMC?
With 26% shareholding, they will have proportionate representation on the board. This means one-fourth of our board members will come from T Rowe Price. But these things will happen gradually.
You have certain sales and distribution tie-ups with other players such as Shinsei Bank. Will you terminate these tie-ups?
No, this deal is independent of the existing arrangements and all such arrangements will continue.
When are you planning the IPO?
The tie-up has just happened. Let our fund management processes improve and then, at the second stage, we will look at the IPO. In the history of this company, tying up with T Rowe Price is a milestone and such decisions are not taken everyday.
Is the earlier plan of diluting 49% through the IPO still valid?
We have got some exclusive businesses such as postal life insurance services and new pension scheme through the government. We have to see how these businesses evolve during the coming year. If we see that these businesses are just temporary and not going to stay with us for long then we can decide to dilute even more than 49%. But if these turn out to be beneficial for us, we may consider to dilute less. This matter has to be evaluated with the government.
What are your plans for the company’s private equity and venture capital businesses?
In venture capital we have two funds—a $25 million fund and a $175 million fund—and (we are) in the process of raising the third fund. We plan to raise $300-350 million. We have not gone for retail and high networth individual money but strong institutional investors that will give us respectability, value and confidence.
UTI has also floated a private equity infrastructure fund that will be closed by December. The target is $400 million.
The removal of entry load will dent the income of mutual funds. What will be the impact on your fund house?
Every company has to comply with the regulatory changes and processes. The regulator’s decision to remove the entry load for mutual fund investments from 1 August has dealt us a severe blow. The whole industry has seen negative sales between September and November.
Also, many mutual fund distributors sell insurance products and no such change has been made in the insurance industry. So, the distributors find it more profitable to sell insurance products and this further dampens mutual fund sales. How long can an industry survive with negative sales?
So, it is a serious matter. In fact, some reports suggest that the smaller fund houses may have to close down their businesses.