An old fund house’s new avatar

And, the other side to the Sebi move on mutual fund holding

The Securities and Exchange Board of India (Sebi) last week laid down the rules on a single sponsor holding shares in more than one fund house.

One common implication that has been widely discussed is the impact the rules would have on UTI Mutual Fund, the country’s first and oldest house.

The second is the implication for other fund houses.

Let us discuss both. First, the move, assuming it is religiously followed by the public sector biggies such as State Bank of India, Life Insurance Corp, Bank of Baroda, and Punjab National Bank, is that the nature of UTI would change completely for the second time in two decades.

The first change was after the Mastershare crisis, when it was divided into Special Undertaking of Unit Trust of India (SUUTI) and UTI Asset Management (AMC). The four public sector entities came to own a quarter of the AMC.

Though the then UTI chief, M Damodaran, had at that time suggested that all these four entities merge their own MF arms with UTI MF, this suggestion was not heeded.

In 2010, T Rowe Price picked a 26 per cent stake, thereby reducing the others to 18.5 per cent each. At that time, the US fund house had paid ~6.5 billion, valuing the company at ~26 billion.

Since then, there has been talk of initial public offering by the firm. But, somehow the float has been elusive.

Reliance Nippon Life Asset Management (RNAM) has overtaken UTI and had a valuation of over ~150 billion earlier this year. Today, it has a market value of around ~180 billion. At ~1.5 trillion, UTI’s assets under management are two-thirds of those of RNAM.

Going by this metric alone, UTI would be hoping to command a valuation of ~100-120 billion. UTI shareholders might be hoping to walk home with about ~10 billion each by selling the extra 8.5 per cent they now hold.

Now, the new Sebi rule creates a possibility of UTI becoming a foreign fund house if T Rowe decides to buy shares from others.

But valuation could be an issue. Another issue could be the vague clause of “reasonable time” for conforming to the 10 per cent rule. Though some reports have said this will be done in a year, the timeliness of compliance remains to be seen — more so when public sector firms are used to getting extensions even if Sebi gives a definite timeline.

The second and more interesting aspect of the rule is that it opens up the possibility of mutual funds and their schemes holding significant minority stakes in other mutual funds. This becomes important when the funds have gone the listing way. Therefore, the Sebi rule should be read as one providing more freedom rather than limiting.

On the one hand, it tacitly allows public sector institutions to ride two horses, and, on the other hand, creates a sense of fairplay or level playing field by allowing everyone else to do so.

The move opens up possibilities for large fund houses which are on the road to IPO. They can also set valuation benchmarks by placing their shares with other fund houses and sponsors before hitting the market.

There would also be the possibility of barter-type deals between various fund houses.

For investors in RNAM, it’s time to laugh their way to the bank as institutions rush to buy a piece of this emerging sector. The stock has gained 5 per cent in two days.