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Union to create India’s biggest mutual fund

State Bank of India has initiated a proposal to acquire UTI Mutual Fund and merge it with its asset management arm SBI Mutual Fund, three people familiar with the state-run banking behemoth’s plans have told ET. SBI had made the proposal to the department of financial services, which in turn has forwarded it to the department of economic affairs for consideration.

Both departments are part of the finance ministry , whose view on the matter is still to be firmed up. The merger plan, if it does pass muster, will create India’s biggest mutual fund by assets while giving the country’s biggest bank a majority stake in such an entity as well as a dominant role in the mutual fund business where it today is one of many players. The sources, who spoke to ET on condition of anonymity , said the proposal was in early stages and SBI had given a detailed representation to the finance ministry .

“There has been some preliminary discussion,“ said one of the sources, a senior government official, without giving details. SBI Chairman Arundhati Bhattacharya declined comment. Officials at UTI could not be immediately reached for comment. SBI already owns 18.5% stake in UTI Mutual Fund. Other state-run entities such as Punjab National Bank, Bank of Baroda and insurer LIC too own 18.5% each in the company while US fund manager T Rowe Price owns 26% and is the largest shareholder. It bought the stake in 2009 for $140 million.

A merger of UTI Mutual Fund, for long India’s pre-eminent fund manager, with SBI’s own fund management business could potentially provide plenty of synergy opportunities to the bank, although it’s not clear whether other shareholders, especially T Rowe Price, will play ball. It was not immediately available for comment. “T Rowe Price has the right to retain 26% stake in the company.In case it decides to stay put, it will have to invest fresh money in the merged entity or SBI may buy its stake at a fair price,“ a second source said.

Another source said LIC, too, could be keen to acquire UTI Mutual Fund and bolt it on to its own mutual fund business, noting that the ball was now in the government’s court since it was ultimately the owner of both entities. SBI will also have to reckon with the views of its partner in the fund management business -European asset management company Amundi SA, which owns 37% of SBI Funds Management that runs SBI Mutual Fund.

Sources said a major reason for the merger proposal was to cre ate a fund management behemoth in which Indian entities would have a majority stake and complete control. “The new entity will be strong enough to venture out in developed markets such as the US,“ said one of the persons cited above, noting that SBI’s move was a departure from the earlier thinking in the previous government to dilute Indian financial institutions’ stake in UTI Mutual Fund by way of a market listing.

“That would have given an impression that T Rowe Price would have got control over the country’s oldest mutual fund, which may have attracted criti cism from the swadeshi brigade,“ this person said. If a deal does get consummated, SBI Mutual Fund and UTI AMC will have combined assets t under management of . `1.6 lakh crore, ahead of the biggest fund t house, HDFC AMC, which had some . `1.5 lakh crore worth of assets in the December quarter. The size of India’s mutual fund industry is around . `11 lakh crore.

The combined entity will be the I strongest company in terms of f net worth (.`950 crore) and rank f second in terms of profitability. t Industry leader HDFC Mutual ( Fund had a net worth of ` . 901 . 522 crore and profit before tax of ` crore at the end of March 2014. Earlier, the finance ministry was keen on UTI AMC listing on the bourses to serve the twin purpose of drawing retail investors to the primary market as well as helping UTI AMC investors to monetise non-core investments.But now the proposal has been pushed for a later date. UTI Mutual Fund was carved out of the erstwhile Unit Trust of India, the country’s first mutual fund, as a Sebi-registered mutual fund from February 1, 2003, through the Unit Trust of India (Transfer of Undertaking & Repeal) Act, 2002.