Sale of SUUTI holdings put on hold
4 min read 23 Aug 2016, 02:15 PM ISTProposal to offload stakes held by SUUTI received lukewarm response from investment bankers
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Mumbai: Poor response from investment bankers has forced the disinvestment department to temporarily put off a proposed sale of company stakes owned by the Specified Undertaking of the Unit Trust of India (SUUTI), said four people with direct knowledge of the development.
Only four investment bankers—SBI Capital Markets Ltd, ICICI Securities Ltd, IDFC Securities Ltd and Edelweiss Financial Services Ltd—submitted unconditional bids to manage the sale and were later invited to make presentations, said one of the four people.
Strict terms and conditions proved to be a deterrent in attracting more bidders for the mandate to manage the sale, which was to start with the disposal of SUUTI stakes in ITC Ltd, Larsen & Toubro Ltd (L&T) and Axis Bank Ltd.
Because of the poor response, the disinvestment department has withdrawn the proposal to sell the stakes, the people cited above said on condition of anonymity.
The government has declared its intention to issue a fresh request for proposal (RFP) without providing any specific timeline.
The Economic Times reported on 22 July that the government’s plan to conduct a sale of stakes held by SUUTI faced hurdles as investment banks had raised concerns citing restrictive fine print in the proposal.
The concerns were highlighted by more than 40 bankers present at the pre-bid meeting on 18 July, said the report.
The RFP barred banks from managing fund-raising plans of rivals competing with companies in which SUUTI held stakes.
Subsequently, the government diluted this clause and only required merchant bankers to intimate SUUTI and the government about potential conflicts of interest.
“While the government diluted the conflict of interest clause for most of the companies in the SUUTI portfolio, it still retained the clause for companies in the Group A—ITC, L&T and Axis Bank. Most of the banks are not comfortable with this conflict of interest clause, which will be one of the factors considered in allotting the mandate," said a second person.
On 25 July, the department of disinvestment issued a revised RFP for stake sales in SUUTI portfolio companies.
The divestment programme was split into three parts. Group A, which included SUUTI holdings in ITC, L&T and Axis Bank, will be up for divestment first. Group B will include the eight unlisted firms in which SUUTI owns shares. Group C will hold the remaining 40 listed firms held by SUUTI.
Under a section called ‘marketing strategy and post-issue market support (for group A companies)’, which had a weightage of 15% in mandate allocation, the RFP listed as one of the evaluation criteria ‘commitment’, which may act either as a constraint, or as a conflicting interest, to bankers’ involvement in the sale of stakes in Group A companies.
“Very few bankers participated as there is a conflict with the finer points of the proposed agreement. If that clause is removed, more banks will be willing to participate," said a banker representing one of the firms that was shortlisted for the financial presentation.
In a notification published on the SUUTI website, the government said it was looking to appoint up to three qualified merchant bankers and selling brokers for “attending, assisting and advising on the SUUTI holdings for a period of three years".
The government asked bidders to put in a single consolidated bid for the entire holdings of SUUTI. The sale process, however, will be carried out individually for the companies in its portfolio.
SUUTI has minority stakes in 51 listed and unlisted companies, with most of its value locked in Axis Bank (11.93% stake), ITC (11.17%) and L&T (8.32%).
At current market prices, the government could raise ₹ 16,553 crore by selling its entire stake in Axis Bank. The government’s stakes in ITC and L&T can fetch ₹ 33,884 crore and ₹ 11,435 crore, respectively.
In March 2014, the government sold a 9% stake in Axis Bank held through SUUTI for over ₹ 5,500 crore.
In addition to the list of 51 listed and unlisted entities, “SUUTI may also consider including other unlisted, illiquid and thinly traded equity shares to its list", said the document seeking bids from bankers.
Parliament bifurcated state-run investment firm Unit Trust of India (UTI) in 2002, creating SUUTI and UTI Asset Management Co. Pvt. Ltd, with the former holding the assured-return investment plans of UTI and the latter overseeing market-linked plans.
The bifurcation took place after UTI’s US-64 investment plan ran into trouble.
The asset sales would help the government meet its ambitious disinvestment target of ₹ 56,500 crore for 2016-17 and shrink the fiscal deficit projected at ₹ 5.33 trillion.
So far this fiscal year, the government has garnered ₹ 2,716.55 crore from a stake sale in NHPC Ltd, according to the department of investment and public asset management.
As part of its larger divestment plan, the government has lined up stake sales in two fertilizer companies—Rashtriya Chemicals and Fertilizers Ltd and National Fertilizers Ltd. The government has also announced its intention to sell stakes in iron ore mining company NMDC Ltd, state-owned trading firms MMTC Ltd and State Trading Corp. of India Ltd, and Oil India Ltd. The government also intends to receive revenue in the form of dividends from cash-rich public sector companies such as Coal India Ltd and National Aluminium Co. Ltd.
A Mint analysis showed that 34 central public sector enterprises hold about 1.8 trillion in cash and equivalent—a war chest that may come in handy as the government pushes some of these firms to consider share buybacks.
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