Sebi move on MF holdings: UTI Mutual Fund may become a foreign fund house

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

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

Second is the implication on other fund houses.

Let us discuss both. Firstly, 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 of such nature that the 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 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 MF arms with UTI MF, this suggestion was not heeded to.

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 Rs 6.5 billion, valuing the company at Rs 26 billion.

From then on, the talk of the initial public offering by the firm has been on. Yet, somehow the float has been elusive.

Reliance Nippon Life Asset management (RNAM) has beaten UTI to the primary market at a valuation of over Rs 150 billion earlier this year. Today, it has a market value of around Rs 180 billion . At Rs 1.5 trillion, UTI has two-thirds assets under management as RNAM.

Going by this metric alone, UTI would be hoping to command a valuation of around Rs 100-120 billion. The UTI shareholders might be hoping to walk home with about Rs 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 itself decides to buy from others.

But, valuation could be an issue. Another issue could be the vague clause of “reasonable time” for conforming with the 10 per cent rule. Though some reports have said this will be done in one 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 the one providing more freedom rather than limiting.

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

The move opens up the possibility for large fund houses, which are on the road to IPO. They can also set valuation benchmark 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 the investors in RNAM stock, its already time to laugh all the way to bank as institutions rush to buy a piece of this emerging sector. The stock has gained 5 per cent in two days.