UTI-ILFS: an issue of corporate governance

The interesting little battle brewing between UTI and the Infrastructure Leasing amp; Financial Services ILamp;FS has set the stage f...

The interesting little battle brewing between UTI and the Infrastructure Leasing amp; Financial Services ILamp;FS has set the stage for ushering in major changes in the organisation of Indian financial institutions FIs and to make way for genuine corporate governance. Last week a newspaper reported that UTI Chairman P.S. Subramaniam, who is attempting to make decent corporate citizens out of companies had informed8217; ILamp;FS that it wants a three member supervisory board to monitor its functioning on a quarterly basis. UTI was making this demand as the largest shareholder of ILamp;FS. Its reasons: ILamp;FS has too huge a board of directors for effective supervision and had spread itself thin over too many activities without a clear strategic focus8217;.

The news report, which appeared a day after ILamp;FS8217;s board meeting did not say that UTI8217;s demand was a condition to approving Ravi Parthasarthy8217;s ascent from Vice Chairman and Managing Director to CMD, after Deepak Parekh stepped down from Chairmanship. The matter wasapparently finalised a few weeks ago and ILamp;FS was to issue a press statement on it.

Instead, it next came up for discussion at the ILamp;FS board, without being on the agenda for the Wednesday meeting. The UTI representative was not present that day to present its case. At the meeting, several members including R.C. Bhargava and Keshab Mahindra opposed the concept of the supervisory board saying that the Companies Act does not allow its formation. They felt at best there could be an advisory board, without usurping the responsibilities of the directors. Though the issue has been postponed, a battle line has been drawn.

Several factors sets this battle up as a path breaker for institutional corporate governance. While, UTI8217;s stand seems perfectly justified, its present circumstances weaken its position. It is in deep trouble even after the budget bailout and needs urgent restructuring of its own operations. One can even say that this should happen before it preaches corporate governance toothers.

Ironically, it is the still-secret Deepak Parekh8217;s committee which has recommended specific measures for restructuring UTI. Among other things, it has asked for a recapitalisation of the trust by raising the permanent capital8217; of the initial sponsors from Rs five crores to Rs 500 crores. Logically, the sponsors, could demand a similar supervisory board, to oversee UTI8217;s huge operations managed by a few fund managers, especially when such fund managers have done so badly in the past.

UTI8217;s stand with regard to ILamp;FS also has a lot of sympathy among its shareholders. Its activities, apart from all those in its name include among many others, stock broking, merchant banking, venture capital, and strategic investments in projects such as Iridium, etc. It has a mixed bag of powerful shareholders and international associates who help it tap international funds. Apart from a big ally in Chairman Parekh, its other major shareholders include IFC Washington, Credit Commerciale of France, Orix of Japan,SBI, and its own Employees8217; Welfare Trust. It is also connected to several others such as American International Group, and the Commonwealth Development Fund .

While the company has never been listed it is not as though ILamp;FS did not want to go public. It is just that the market did not seem right whenever it made the attempt in the last seven years. UTI was at the receiving end of its attempts and ended up holding 30 per cent of the equity instead of 18.2 per cent initially after some financial maneouvers including warehousing and de-warehousing its shares.

Story continues below this ad

Its complaint regarding the large board is also valid. Its own 30 per cent gives it only one board representation, while the ILamp;FS board like that of ICICI is packed with at least five employee directors, allowing the company to do exactly what it pleases. ILamp;FS does make profits, but several shareholders believe it could earn much more if it did not spread itself thin over what one of them calls various hobbies8217;. Subramaniam8217;s friends apparentlywarned him not to 8220;take on ILamp;FS8221; and its powerful allies. But, UTI is apparently banking on a little ace.

The finance ministry, worried about the pathetic market perception of the FIs, has been quietly working on a corporate governance code for financial institutions. A report commissioned by it before the budget has apparently raised similar issues as UTI has, including appointments and packing of the board with employee directors. And the ministry does have reasons to worry. If ILamp;FS has escaped market valuation, then IDBI is languishing at Rs 30 against its original issue price of Rs 134, ICICI is at Rs 43 and IFCI poised to create history by dropping below par.

As in everything, the issue will finally be resolved by the finance ministry. It will be a choice between whether friendly finance ministry mandarins ensure that ILamp;FS does not have 8220;some self opinionated people breathing down its neck8221; or it decides to make FI managements more professional 8212; including UTI 8212; by forcing them to adopt acommon set of rules for better accountability.The author8217;s e-mail is: suchetadalalyahoo.com