US firm to buy 26% stake in UTI AMC

US-based asset management firm T Rowe Price is set to acquire a 26 per cent stake in UTI Asset Management Company (AMC) for around Rs 650 crore. This values the fund house at around Rs 2,600 crore. The deal amount translates into 3.5 per cent of UTI’s average assets under management (AAUM) at the end of August. UTI is the country’s fourth-largest fund house with AAUM of Rs 73,925 crore at the end of August.

Sources close to the development said the four sponsors — SBI, LIC, Punjab National Bank and Bank of Baroda — would sell 6.25 per cent each to T Rowe Price, which would be a strategic partner for the country’s oldest mutual fund. Boards of at least two entities, SBI and LIC, had cleared the sale, the sources said.

An official announcement could, however, take a couple of more weeks, they added.

Apart from bolstering the fund house’s operations, T Rowe Price would invest in UTI Venture and other private equity funds being set up by the institution. The US company’s investments in India would be routed through UTI, the sources said. The Indian asset management company would gain from T Rowe Price’s global research and experience in fund management. In addition, UTI would be able to leverage the US firm’s tie-ups with international banks such as Citi to sell its products in the international markets.

The last such deal in India, acquisition of DBS Cholamandalan by L&T Finance, was at 1.56 per cent of the AAUM. In August, Nomura had acquired 35 per cent in LIC Mutual Fund for Rs 800 crore, which valued the Indian fund house at around 2.5 per cent of its then AAUM.

Market sources said valuations had dropped considerably after the ban on entry load and restrictions on exit loads. As a result of these curbs, put in place by the Securities and Exchange Board of India, fund houses would have to compensate distributors in some other ways. According to some assessments, their margins could drop by up to 90 per cent.

The sale follows an earlier attempt by UTI AMC which was aborted last year due to low valuations. In July 2008, the mutual fund had shelved its initial public offer plan that would have helped it raise around Rs 2,500 crore and expand operations.

The sale was part of a 2002 arrangement put in place by the government as part of a recast of Unit Trust of India. While the assured return schemes were transferred to a specified undertaking, the market-linked schemes were transferred to UTI AMC and SBI, LIC, BoB and PNB were roped in as the four sponsors. The arrangement was seen as temporary as all four players had their own fund houses and there was a conflict of interest.