The Suuti saga: a series of unfortunate events
The Specified Undertaking of the Unit Trust of India (Suuti), the government agency looking to sell down its holdings in 51 companies, did the right thing when it recently revised a request for proposals after clashing with potential bidders. But the drama shows that the body should have gotten it right the first time.
The Suuti saga is one of the more interesting developments in India’s equity capital markets in recent times. Suuti holds the government’s stakes in 51 listed and unlisted firms, including blue-chip names like Axis Bank, ITC, Larsen & Toubro and the Tata Group’s steel, power, chemicals and motor units.
It kicked off an ambitious plan to offload its minority holdings in these companies in July. But after much wrangling with banks, Suuti was forced to make an about-turn. It pulled, then re-issued the RFP in the past two weeks, after bidders complained that the terms were overly restrictive.
That the whole thing could have been handled more professionally is a given. At the heart of the issue was a non-compete clause that prevented banks that won the Suuti mandate from advising on other transactions for companies in the same sector as the ones belonging to Suuti — for as long as three years.
The incident makes plain that Indian government agencies still have much to learn when it comes to mandating a successful capital markets transaction. The non-compete clause, as bankers have explained, is in nobody’s interest but Suuti’s, and was almost punitive for firms that might have won the mandate.
The RFP was clearly a sought-after opportunity, with as many as 13 of the biggest banks in town, both foreign and local houses, submitting bids. But in the end, only four local firms were shortlisted as the other bids were non-binding. And as many as three of the shortlisted firms were found to be in breach of the non-compete clause.
This was why Suuti finally relented and the terms of the revised RFP are easier to swallow given that the conflict of interest clause now only applies until a Suuti transaction is completed.
But Suuti could have saved the time and money, as well as spared itself the embarrassment of having to restart the process, if only it had taken on board all the feedback from banks during the pre-bid meetings. This was not a case of the banks wanting a deal with the best terms for themselves, but one where they wanted a system that was fair.
Banks regularly reach out to clients in the same sector in an effort to build a franchise. But if Suuti had its way, it would have choked off a ton of business for the mandated firms. A three-year non-compete clause is enough to kill off any franchise.
Suuti should also remember that the divestments will come at an exciting time for Indian ECM, with IPOs headed for a record year as investors clamour for shares. The government shouldn’t let the positive sentiment go to waste.
After all, this isn’t just an opportunity to make some money off a couple of sell-downs. It is instead a chance to bring in marquee foreign investors into some of India’s biggest companies and add a meaningful amount to the state coffers. Suuti owes itself that much at the very least.