The recent approval by SEBI of UTI’s application for an IPO is culmination of an effort by various quarters to dilute (or rather eliminate) the control of the original promoters (and hence GOI) over the company, thereby virtually handing over the control of the company to a minority shareholder. I believe UTI IPO should be abandoned.

Background

The trigger was a direction issued by SEBI in March 2018, which for all practical purposes was targeted solely at the four Public Sector promoter shareholders in UTI (SBI, LIC, BoB, PNB), citing ‘conflict of interest’ as all four of them had their own AMCs too.

No other entity in India was affected by this new regulation

No other entity in India except UTI was affected by this new regulation. The directions ensured that the existing promoters will never have any representation on the Board of UTI. (note: Coincidentally, around the same time PNB sold its entire stake in its own Mutual Fund and is now not impacted by the SEBI direction).

2.               Under the normal circumstances, any stake purchase by an investor that would end-up giving them a control over the company would entail paying a substantial premium over the valuation. In the current scenario, thanks to SEBI’s directions, the minority shareholder may end-up gaining control over the company by default, free of cost.

And Govt. of India would lose its control over UTI in spite of continuing to own the largest stake in UTI through its entities, even after the proposed IPO.

Entry of a Strategic Investor

3.               Sometime in 2008-2009, UTI had zeroed in on its choice of a strategic investor and all stakeholders had agreed on the valuations for the stake sale. I got involved as a key player in the team negotiating the finer terms of the transaction with the proposed investor that would have led to a shareholders’ agreement.

Ensured continued control of Govt. of India in UTI

4.               We were able to clinch two contentious issues – entitlements for representation on the board and the right of first refusal (ROFR), in our favour by both sides agreeing on –

a.     proportionate representation on the board and

b.     the right of existing promoters to sell their shareholding amongst themselves or to any other govt. controlled entity without triggering ROFR in favour of the incoming investor.

The sole purpose of these two conditions was to protect the interests and continued control of Govt. of India in UTI through its entities.

How UTI IPO Can be Abandoned

5.               Of special significance is the ROFR term agreed, as per which any one or more of SBI, LIC, PNB and BoB should be sell all or a part of their stake in UTI to each other or to any other govt. controlled entity.

It is not apparent if the authorities have even evaluated that the conflict of interest issue raised by SEBI can be addressed simply by selling the shareholding of SBI, LIC and BoB to any other Govt. entity.

In fact, the best alternative would probably be to sell LIC’s own tiny AMC to another Govt. entity (say PNB) and transfer the entire stake in UTI held by SBI, PNB and BoB to LIC. Thus, LIC will end-up holding the entire stake of govt. entities in UTI. This will ensure proportionate representation of LIC on the Board of UTI and will protect the interests of GOI in UTI.

Why would govt. allow its control over UTI to be lost by default.

In case the govt. has already evaluated this option and rejected it, it would make one wonder why it would allow the company to be handed over to an outsider by default.

Alarm

6.               Concerned as I was, I sent a complaint to Prime Minister’s Office, under Whistle Blowers Protection Act, a few months back. No response has been received from any quarters till date. The complaint, surprisingly, was forwarded to SEBI whose conduct in the matter itself probably should be a matter of investigation.

7.               It is particularly important to note that this matter is not being raised by me at the last minute after the IPO has been approved by SEBI. I reiterate that my complaint to PM/PMO was submitted several months back.

Should UTI IPO be abandoned.

With the IPO approval in place, the matter gains some urgency and therefore in public interest I am placing the entire issue in public domain for wider debate – Should Govt. of India let go of its control over UTI by default?

PS: A version of this article was originally published as a LinkedIn article here.