Foreign funds have started approaching Unit Trust of India for buying its 33.56 per cent stake in UTI Bank.

Any investor who takes this stake will have a majority control of the bank. Other investors in the bank could also tag along with UTI to sell their equity holdings in the bank.

A top UTI source confirmed the development, saying that some funds had approached UTI for its stake in the bank. "It's logical that UTI will sell its stake in the bank. But this is not happening right now," the source said.

Sources added that the fund had already factored in the receipt from the sale of the stake in its projected funds flow statement for this financial year.

Though UTI's stake in UTI Bank has come down from 60.65 per cent in 2001 to 33.56 per cent currently, it has not made much money as the major part of the dilution was through preferential issues.

In the first stage, UTI's stake in the bank fell to 44.9 per cent after the 26 per cent stake sale to CDC in 2001 at Rs 34 per share.

This was followed by a preferential allotment of about 1.35 crore (13.5 million) equity shares at Rs 39.04 per share to the Life Insurance Corporation of India, the General Insurance Corporation, National Insurance Company and New India Assurance Company in March 2002, reducing UTI's stake in the bank to 41.71 per cent.

The shareholding of UTI in the bank was reduced to 33.56 per cent after a preferential issue to LIC, Chrysallis Capital, an equity fund of Citicorp and Karur Vysya Bank last month.

Sources said any investor which takes over the 33 per cent stake will also have to make an open offer for another 20 per cent. CDC, which has a 20.14 per cent stake in the bank, has a right to tag along with UTI.

"UTI can look at a control premium for the bank. Effectively, the new investor's stake in the bank can go all the way up to more than 60 per cent on the back of the open offer and the stake being held by other investors."

"Some of the foreign banks, especially European banks which have aggressive India plans, could be interested in looking at the UTI stake. However, in order to avoid any controversies, the sale could be through a bidding process," sources said.

However, the go-ahead from the finance ministry is likely to come only after the report of the standing committee on IDBI is tabled in Parliament, which will pave the path for the IDBI Bank stake sale.

According to the shareholders agreement signed with CDC, UTI cannot bring down its stake in the bank to less than 26 per cent unless UTI and the investors mutually agree that it would be in the best interests of the bank.

However, if UTI wants to bring its stake to less than 26 per cent, each investor shall have the right of first refusal and a tag-along right.

CDC had also asked UTI Bank to obtain the 'unconditional written consent of UTI' for using the 'UTI' name as part of the bank's name without any payment to the parent.

The consent can be terminated only if UTI's shareholding in the bank is brought below 10 per cent.

The tag-along right will, however, not be applicable if UTI is forced to sell its shares because of a statutory direction and 'despite UTI's best efforts to give to the investors a tag-along right, the giving of such tag-along right would prevent UTI from complying with the said statutory direction.'