Government’s LIC move may help SUUTI dilution

The finance ministry’s move to allow state-run insurer Life Insurance Corp of India (LIC) to own up to 30 per cent in listed companies could help ease the deadlock on the long-pending dissolution of the Special Undertaking of UTI (SUUTI).

According to data provided by the BS Research Bureau, SUUTI held more than one per cent stake in 19 firms. The holding is worth a staggering Rs 45,000 crore, enough to meet this year’s disinvestment target in one stroke. The bulk of this comes from the undertaking’s holding in three blue chips  11.41 per cent in ITC Ltd, 8.24 per cent in Larsen and Toubro Ltd (L&T) and 22.79 per cent in Axis Bank Ltd.

LIC also holds significant chunks in these companies. According to latest data, the insurer holds 17.7 per cent in L&T, 11.9 per cent in ITC and 9.32 per cent in Axis Bank. If LIC were to acquire the SUUTI stake, it has to go over 20 per cent in all these cases. In Axis Bank’s case, even the newly extended 30 per cent limit would not be enough as the combined stake would be 32.11 per cent. In the case of L&T, the combined stake could go up to 25.9 per cent and in ITC, it could become 23.3 per cent.

It is possible that the insurer stays short of the 25 per cent limit in L&T, as it could trigger the open offer obligations under the Sebi takeover code. According to takeover regulations, any acquirer which crosses 25 per cent would have to make an open offer to minority shareholders to acquire a further 26 per cent.

In the case of Axis Bank, both SUUTI and LIC are listed as promoter shareholders, which could enable an inter se transfer, say experts. However, under the new takeover code, the 25 per cent trigger operates even at the individual entity level.

Following fresh allotment of shares to shareholders of Enam Securities following the merger on October 20, the stakes of LIC and SUUTI came down marginally. Before the merger, their combined stake was 33 per cent.

These three companies do not have an identifiable promoter group shareholders and are run by professional managements. Any offloading of shares by the government would have resulted in transfer of control to potential buyers creating uncertainty. A transfer to LIC could, however, help maintain status quo as LIC is a financial investor and does not have interest in running companies, analysts said. In October, finance minister P Chidambaram had said there was no plan to sell SUUTI stake as of now.

ICICI Securities , one of the investment banks involved in the divestment programme, had submitted a white paper suggesting the sale of holdings in SUUTI as one of the ways of unlocking value for the government. When the white paper was submitted, the value of SUUTI holdings was little over Rs 31,000 crore. In the past one year, the portfolio has already gained by over 50 per cent.