 "Will SUUTI leave Trishanku heaven?")
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National Financial Holdings Company (NFHCL) had its fourth anniversary earlier this month.
- In early 2012, in his last Budget speech before becoming the country's president, then finance minister Pranab Mukherjee spoke about forming a financial holding company, which could be used as a vehicle for capitalisation of public sector banks. Soon after, the Union cabinet cleared a proposal to wind up the Specified Undertaking–Unit Trust of India (Suuti).
Four years on, NFHCL is far from taking wings even though the government had incorporated it, with Rs 1 crore as capital, in June 2012. To date, no Suuti assets have been transferred to NFHCL as planned. The story of Suuti, since then, remained chequered.
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The funds realised from Suuti, it was decided, could be a good starting point for the proposed financial holding company. Top finance ministry officials such as Thomas Mathew and Anjuly Chib Duggal were named directors, along with K N Prithviraj, administrator of Suuti. While Mathew quit the board in November 2012, the other two continued to be directors as of the latest annual report dated September 2015. Manoj Joshi, joint secretary, department of economic affairs, is a nominee director.
The company reported nominal profit of a few lakh rupees in the past two financial years. Though the plan of transferring Suuti assets is reported to have been shelved, continuance of this company as a going concern and the presence of top ministry officials on its board suggest the government is keeping this option open.
In contrast to this structure is that of Suuti. It has an advisory board. Apart from Prithviraj, it has Manish Singh and B Baburao as members. It does not have any staff of its own or pay any salaries. All the staff are on deputation. It also does not have too many liabilities in terms of dues to investors. But, it has some valuable assets.
While Suuti holds dozens of stocks, both listed and unlisted, most of the value resides in three blue-chips: ITC (11.1 per cent), Larsen & Toubro (8.32 per cent) and Axis Bank (11.93 per cent). As of this week, these holdings were worth Rs 57,574 crore. The portfolio has gained about 70 per cent in value since Mukherjee first proposed the holding company,
Compliance experts said for an entity holding assets of Rs 57,000 crore, this structure does not evoke much public confidence. “If the assets had been transferred to the holding company, it would have been answerable to Parliament and fallen under Comptroller and Auditor General audit,” said a senior company secretary. “With Suuti, such safeguards are absent.”
One theory is that it was precisely to avoid such scrutiny and accountability that the transfer was shelved. Suuti was brought to life in 2003 by an Act, by the government then headed by Atal Behari Vajpayee. It split the erstwhile Unit Trust of India into two entities. UTI’s flagship scheme, US64, and its monthly income plans (MIPs), which had assured returns to investors, were moved to Suuti. The net asset value-based schemes came under UTI Asset Management.
Former Sebi chairman M Damodaran, first administrator of Suuti and who oversaw issue of redemption bonds to over 90 per cent of the 2.6 million investor accounts, recalls how the MIPs that were among the assured return schemes that came to Suuti represented a greater problem, while the public focus was largely on UTI’s flagship scheme, US64.
“Suuti has been kept alive unnecessarily. It was a limited purpose vehicle. It should have been wound up long ago,” Damodaran said. “This must be the first case where the organisation that assisted in the guarantee of bonds, not by infusion of funds, laughed all the way to the bank. This is a rare case where a bailout became a profitable investment. The notional value of these shares are huge. But, you don't need to keep Suuti alive only for an ownership function of these three companies.”
Along with holdings of Life Insurance Corp and General Insurance Corp, administered by the finance ministry, Suuti’s holdings ensures the Union government has control over 26 per cent voting rights in all these companies. While L&T and ITC do not have any promoter shareholder, Suuti and the state-owned insurers are the named promoters in Axis Bank. These assets have now placed Suuti in a Trishanku heaven, though its original purpose of managing the schemes until their redemption is long complete.
The sword of hostile takeover has been hanging on both L&T and ITC for decades. The Reliance group and the Birlas had an eye on L&T, while entities controlled by British American Tobacco are among ITC’s largest shareholders. It was the conscious decision of state-owned institutions to maintain a high holding in these entities to protect their investment.
While these vetoes helped managements of the promoter-less firms keep corporate raiders at bay, it also allowed the government to reward those friendly to the regime with board seats. Recently, for instance, the government appointed senior journalist Swapan Dasgupta to the board of L&T, drawing criticism from fellow journalists. Dasgupta has since resigned as he got a nomination to the Rajya Sabha.
Virender Jain of Midas Touch Investor Association said, “Why is Suuti not selling these stocks? What it boils down to is that they have a big leverage and gives them the right to control these giants (investee companies).”
Some analysts are sympathetic to the way the government functions. Dhirendra Kumar, chief executive officer, Valuer Research, specialising in mutual funds, said: “It is basically government inertia. It is possible that they are just timing the exit in the hope of realising the best value of the holdings.” With the larger economic problems and those in the infrastructure sector, the valuation of these stocks, particularly L&T, is relatively depressed. he notes.
Though housed in UTI Tower, with many employees loaned to it, the UTI AMC spokesperson declined to share any information on Suuti. E-mails to the official ID of NFHCL and the administrator of Suuti elicited no response.
The transfer of assets and liabilities of Suuti to NHFCL was not the last proposal. While a part of the Axis Bank stake of Suuti was sold in 2014 for Rs 5,500 crore, a proposal to float an exchange-traded fund (ETF) was briefly considered. While some reports talked about ICICI Prudential taking up the management of this ETF, this plan got shelved.
The annual account statements of Suuti does not reflect any of these extraneous happenings. In the initial years, it contained details of all 46 assured return schemes transferred to it and ran into hundreds of pages. Today, it has only two distinct accounts, on US64 and ARS Bonds. The size of the balance sheet was close to Rs 12,000 crore. The statements were audited by Ashok Bhartia and Co, Mumbai-based chartered accountants.
The statements showed Suuti booked a profit of about Rs 4,200 crore in the Axis Bank sale. The annual reports also show Suuti had two subsidiaries, UTI Investment Advisory and UTI Infrastructure Technology and Services. And, land, office premises and other fixed assets, across the country. These were valued at Rs 43.5 crore, as of March 2015. Many of these are leased to state-run entities such as the Exim Bank and UTI AMC, and regulators such as the insurance sector's Irdai.
While the original idea in Axis was to retain control and realise a control premium on sale, the part-sale seemed to have defeated that purpose, Suuti watchers said. On Monday, the Cabinet Committee on Economic Affairs cleared Axis' proposal to increase its foreign holding by 12 per cent, to 74 per cent. Suuti's 11.93 per cent can neatly fit into this but no such proposal has been talked about.
Kumar of Value Research said: “The government turns out to be a bad timer of the market. They should just sign it off. While most investors have been paid off, there were many who felt short-changed.” Adding: “The government has benefited from US64. They could be generous to investors.” Jain of Midas Touch Investor Association also feels the government should share the profits of sale with investors.
Damodaran feels there are three ways to do this. One is to park these three holdings in three (state-owned) companies in nearly similar businesses. For example, L&T shares could be placed with Bharat Heavy Electricals. Two, create a separate institution to hold these shares. The third way is for Suuti itself to be converted into a holding company, which Damodaran himself had proposed when P Chidambaram was the finance minister. “That was shot down.”
Until one of these proposals find their way through, Suuti can’t rest in peace.
THE STORY SO FAR
Oct ‘02: Unit Trust of India (Transfer of Undertaking and Repeal) ACT, 2002 passed
Dec ‘02: Act comes into force after Gazette notification
Feb ‘03: Government appoints M Damodaran, then chairman IDBI, as the first Administrator
Jul ‘03: Notification of Suuti scheme that governs the management of assets, redemptions, investments etc
31 May ‘03: Foreclosure of US 64, the country's first mutual fund scheme; Two options: cash or 6.75 per cent US 64 bonds
Mar ‘04: 6.6% ARS bonds issued as part of redemption of other Assured Returns Schemes that came under Suuti
Jan ‘08: Original winding up date; extension given till March 2009
Aug ‘08: Suuti appoints merchant bankers to sell Axis Bank 21% stake in Axis bank; At this point, the value of Suuti's L&T, ITC & Axis stakes at about Rs 21,000 crore
Sep ‘08: Lehman Brothers collapse triggers global financial crisis; sale shelved
2008-09: US 64 bonds and ARS bonds redeemed
Jul ‘09: Five-year extension for Suuti
Mar ‘12: Plan to float NFHCL; Cabinet clearance to wind up Suuti
2014: Part stake in Axis Bank sold at Rs 5,500 crore
Mar ‘15: Suuti stake sale part of govt's ambitious divestment target of Rs 69,500 crore
Jul ‘16: Foreign investment cap on Axis Bank raised by 12%
Source: News reports, suuti.in, annual account statements, notices
