Infrastructure merger

In 1996, when the Chennai-headquartered Infrastructure Development Finance Company Ltd IDFC was set up, it was obvious to everybody that i...

In 1996, when the Chennai-headquartered Infrastructure Development Finance Company Ltd IDFC was set up, it was obvious to everybody that it was duplicating what the Infrastructure Leasing 038; Financial Service IL038;FS was supposed to do.

But the then Finance Minister P. Chidambaram wanted a financial institution based in Chennai and got his way. For the next two years or more, IDFC and IL038;FS had a common chairman in Deepak Parekh; many of its shareholders8212;Indian and foreign8212;are also the same. We now learn that the obvious merger of IDFC and IL038;FS is finally being discussed.

The trigger may have been Unit Trust of India8217;s UTI-I need to divest its 22 per cent stake in IL038;FS and the fact that it can8217;t find any buyers. The International Finance Corporation IFC, Washington, which holds shares in both institutions, wants to exercise its put option and exit from IL038;FS, but neither UTI not HDFC, which were to pick up IFC8217;s stake when it chose to exit, want additional shares.

According to our source, the fact that both institutions are private should make the merger easier. One a lighter note, the prospect of moving into IL038;FS8217;s dazzling new office building in Mumbai should make IDFC amenable to a merger.

UTI8217;s other investments

An IL038;FS-IDFC merger would reduce UTI-I8217;s holding in the new entity, and UTI Bank is clearly its most encashable investment, but what happens to all the other institutions that UTI helped to build in its avatar of a development finance institution? Apparently, UTI may not do too badly with those too.

It has already sold its stake in the Discount and Finance House of India to State Bank of India SBI at a higher price than the Reserve Bank got for its stake. The controversial Stock Holding Corporation of India SHCIL figures prominently and controversially in the Action Taken Report ATR on Scam 2000, but its large custodial business apparently has many potential buyers among the foreign custodial firms, if the government agrees to sell out.

As for the rest 8212; the holdings in National Stock Exchange, OTCEI, National Share Depository and the stock brokerage and registrar outfits 8212; we learn that they will all be auctioned 8216;through a fair and transparent8217; process.

Valuing UTI-II

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As for UTI-II comprising the NAV-based schemes of UTI, despite the confusion over whether a big chunk of its equity will be sold to a strategic partner within three years or five, the government has already ordered a detailed valuation of the Fund.

Audit firms PriceWaterhouseCoopers PwC and S.R. Batliboi 038; Co are doing a general due diligence and overall valuation of UTI-II, while PwC, Chandabhoy Jassoobhoy and Khimji Kunverji 038; Co have been assigned specific audit of various schemes.

When UTI was split into two, and SBI, Life Insurance Corporation of India LIC, Bank of Baroda BoB and Punjab National Bank PNB were made its sponsors they were given three years in which to pay government for the privilege. We learn that only SBI is keen acquiring control over UTI-II by enhancing its holding.

Naturally, it is also keen on the outcome of the valuation exercise. But while government may want to get the best value for UTI-II, SBI will want to get it at the lowest cost. If the price suits SBI then one may see UTI-II merging with SBI Mutual Fund before the three-year period is up.

Numero Uno offer

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Bollywood actor-producer Sanjay Khan was at the UTI last Thursday with an offer to buyback its controversial holding in his company Numero Uno. UTI had bought the shares at Rs 500 each in a private placement deal and the company had confidently claimed, in the heydays of the Ketan Parekh-led bull mania, that it would compensate UTI for any loss in the transaction.

The Joint Parliamentary Committee JPC had instructed UTI to pursue civil and criminal proceedings against Numero Uno and Ambit Finance, which placed the shares. It also sought action against UTI officials responsible for processing the transaction and approving the deal.

Sanjay Khan8217;s buyback offer was apparently in response to a legal notice from UTI. But Khan8217;s offer was far lower than what UTI paid for the shares, and the matter may end up in litigation. While Sanjay Khan may face prosecution, the Action Taken Report to Parliament is completely silent about the role of UTI officials who did the deal.

Market reports say that investment in Numero Uno, like other scandalous private placement deals by UTI, was cleared at the highest level in the institution.

Email Sucheta Dalal