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The Future of UTI

UTI Mutual Fund has been leaderless for 9 months & it won't be too long before investors start feeling the impact of this…

In Value Research’s analyses of mutual funds, we have always maintained that the business affairs of a fund company is of minimal practical importance to investors. Investors don’t normally have to bother about who the promoter of a fund company is or who the CEO is and who’s on the board of directors. The regulatory framework acts as a firewall, ensuring that any issues on the business side don’t affect the investors.

However, in the long run, the leadership of a business matters, and can’t but affect its customers, as it might soon start doing in the case of UTI Mutual Fund. The AMC has been leaderless for nine months, since CMD UK Sinha left to take over as the head of SEBI. Those who follow UTI closely can see enough signs that slowly, but inevitably, the organisation is getting affected by the uncertainty that is accumulating. It can’t be too long before investors will start feeling the impact of this problem.

In newspaper reports over the last few months, this is the narrative that has been presented. UTI Mutual Fund has five shareholders. The American fund company T. Rowe Price is the largest, with 26 per cent. The rest is equally divided (18.5 per cent each) between four public sector organisations, Punjab National Bank, State Bank of India, LIC and Bank of Baroda. Over the last few months, there has been a conflict between the board of directors and the ministry of finance. The board had a list of professional candidates for the CEO’s post while the ministry apparently wanted a civil servant.

It has now been almost three month since we have been hearing that the issue has been resolved by the ministry putting its foot down and a new CMD would be appointed soon but nothing has actually happened. The root cause of this entire problem is a disconnect between what UTI really is and a fictional idea of what it is. On paper, UTI was owned by four large financial industry entities, each of whom then sold 26 per cent of their stake to give a majority stake to an American company. This is fiction. The reality is that UTI is a public sector company, and the real board sits in North Block. This real board has now decided to mount a hostile takeover and push out the paper board that meets in UTI Towers in Mumbai.

However, unlike most of the commentary that has appeared in the media, I actually happen to think that there is nothing inherently wrong in this. There are plenty of good public sector companies and there's no reason that UTI can’t be one in the fund management business. One can’t automatically assume that a finance industry professional must necessarily be more suited to running UTI, with all its unique baggage and complexities, than a civil servant. There’s no dearth of companies that have been mismanaged by professionals and there’s no dearth of organisations that are run well by civil servants, and I think UTI’s own recent history is ample proof of that.

However, for the sake of investors who have again come to trust UTI despite past fiascos (and certainly, many of its funds deserve that trust), one just hopes that whatever has to be done is done quickly and the organisation moves forward again. Otherwise, slowly but surely, UTI will keep falling behind others, its better people will leave one by one and eventually it'll stop being relevant to investors.