UTI MF looks to bury ghosts of the past

After several episodes of boardroom stand-offs and a near courtroom collision, the two-decade-old idea of listing of India's oldest mutual fund (MF) may be finally coming to fruition. The Securities and Exchange Board of India (Sebi) recently gave its approval to the initial public offering (IPO) papers filed by UTI Asset Management Company (AMC).

The ‘UTI’ brand has been synonymous with MF investing in India and continues to enjoy a strong brand value, especially in beyond the top-30 or B-30 cities. Industry insiders say until today, UTI has a high brand recall in smaller cities, when investors consider building an MF portfolio. However, boardroom differences among shareholders —to the point where the AMC was headless at different points in time — have made it difficult for UTI AMC to fully leverage this brand power.

In December last year, the AMC re-filed the draft red herring prospectus (DRHP) for the IPO, indicating its shareholders were now finally on the same page and the appointment of UTI old-timer Imtaiyazur Rahman as chief executive officer (CEO) was acceptable to all, to take the AMC into the next phase of transition.

While the idea of the IPO was floated by its first chairman M Damodaran in the early 2000s, the AMC first filed for its offer document in 2008. However, the IPO couldn’t materialise due to the global financial crisis. Its search for a strategic partner in the following years came to an end when Us-based asset manager T Rowe Price (TRP) bought a 26 per cent stake in the AMC in 2010, with the four state-owned shareholders selling 6.5 per stake each.

Though the IPO would allow TRP to finally unlock the value of its 10year-old investment in the AMC, industry experts have reservations whether listing would be enough to create long-term value for the new and existing shareholders.

Their concerns stem from the state-owned shareholders still holding over 45 per cent stake in the AMC after the IPO. “If listing paves the way for UTI AMC to being run like other professionally driven companies, where promoter-related interference is minimal, the AMC can find itself in a favourable spot,” said Dhirendra Kumar, founder and chief executive officer of mutual fund (MF) tracker Value Research.

However, industry participants question whether meddling by some of the PSU shareholders will cease after listing, with these institutions still owning a sizeable stake. “In the past, there have also been reports of direct interference from the government, resulting in the AMC being headless for a considerable period,” said a senior executive of a fund house.

After U K Sinha quit the AMC in 2011, the fund house was without any head for two years, with the finance ministry’s office reportedly pitching for a bureaucrat’s candidature for the top job. Lack of stability in leadership has often been the Achilles’ heel for the ~1.5-trillion asset manager and has also come in the way of the firm’s growth.

Losing ground

Between 2017 and 2020 when the MF industry’s domestic asset base compounded annually at 13.88 per cent (comparing quarterly average

assets for the March quarter), UTI MF’S domestic asset base compounded annually at 3.54 per cent.

Back in 2011-2012, the AMC was unable to launch new products as the regulatory framework of Sebi didn’t allow an AMC to launch new funds without a head. The firm was yet to find a replacement for Sinha, one year after he had stepped down. Finally, Rahman was given the role of interim CEO.

“Once UTI was the top player and pre-eminent brand in the MF industry. To what extent that preeminence remains today, we will come to know from the valuation the market is willing to give to the AMC,” said Joydeep Sen, consultant at Phillipcapital.

When TRP bought the 26 per cent stake in 2010 for ~650 crore, the asset manager was the fourth-largest player in the country. Today, it is the seventh-largest asset manager.

Revolving doors

Since 2003, when UTI AMC was bifurcated from Unit Trust of India, the asset manager has seen four changes at the top. The AMC’S asset growth trajectory also indicates that this has not helped matters in an industry where long-term leadership is considered a critical factor.

After Sinha quit the post to take the reins at Sebi in 2011, the AMC was headless until Leo Puri, former managing director at private equity

firm Warburg Pincus and senior adviser at consulting firm Mckinsey, was brought in, in 2013.

When Puri’s five-year term came to an end in 2018, another round of infighting between TRP and the state-owned shareholders ensued, with TRP pushing for an extendedterm for Puri to keep the IPO plans on track. However, with the board split, Puri decided to step down at the end of his term and search for a new CEO resumed.

TRP, which had even moved the Bombay High Court in 2018 seeking an extension of Puri’s term, withdrew its petition as it was given assurances that the PSU shareholders would bring down their stake to meet Sebi’s cross-holding norms and the IPO would be launched soon.

The upcoming IPO is expected to finally ensure that the shareholders of UTI AMC comply with the regulations, after missing the previous deadline.

Getting back on track

Nearly two years after Puri’s term ended, interim CEO Rahman was appointed as full-time CEO in June. The move came just ahead of Sebi’s IPO nod.

Rahman, who has been with the UTI group since 1998 and has worked at various senior positions, has twice been brought in to fill the vacuum left in the corner office after incumbent managing directors exited. After both Sinha’s and Puri’s exits, Rahman acted as interim CEO. “Rahman could potentially provide the long-term stability that the AMC has been looking for, as he has been with the UTI group for a long time and has been part of various phases in UTI’S history,” said a senior executive at another fund house.

“Rahman has been appointed CEO to address Sebi’s concerns over the CEO position lying vacant, but the markets might try and discount any concerns over leadership continuity and be wary if any differences between promoter-shareholders were to crop up again,” said a fund manager at a large-sized AMC.

Completing the circle

UTI AMC is not any ordinary fund house. It came into being with an Act of Parliament and has also been led by bureaucrats, who have headed Sebi at different points. MF distributors say that while UTI’S name still strikes a chord with several investors, the AMC needs to make certain changes to rekindle its growth. “UTI AMC needs to create a responsive, nimble-footed sales network and build stronger connections with independent financial advisors (IFA). We are seeing some progress with new sales hires in recent months,” said Amit Charadva, IFA, with an asset base of over ~100 crore in Junagadh (B-30 city).

Investment banking sources suggest the AMC may seek a valuation of ~10,000 crore in the IPO. At this price, it will be valued at 6 per cent of its domestic asset base, which is lower than the valuations that the other two listed AMCS are getting.

Nippon India MF is currently being valued at nearly 10 per cent of its asset base on the bourses, whereas HDFC MF is getting valued at 14 per cent. Industry experts say that UTI AMC has the potential to quickly narrow down this valuation gap, but it will depend on whether it is finally able to leave behind its past baggage and steadily regain its lost sheen.