HSBC raised $145 million late last week after selling a 7.19% stake in UTI Bank, the banking subsidiary of IndiaÆs largest mutual fund, the Unit Trust of India. The stake was sold to a small handful of funds including Fidelity Funds Mauritius, Crown Capital and Master Trust Bank.

HSBC divested the shares at an average price of Rs.318.60 each versus an acquisition price of Rs90 from private equity fund Actis (then CDC Capital Partners). As such the bank has booked a tidy profit in excess of $100 million on the stake, but is unlikely to be thrilled with its success given the history behind the deal.

It will now own 4.99% in UTI Bank, which means it is in compliance with Reserve Bank of India (RBI) guidlines on foreign bank ownership of Indian banks. The divestment marks the end of a saga, which began in December 2003 when it announced the acquisition from Actis.

By June 2004 HSBC held a 14.62% stake in UTI Bank. The investment was made at a time when India, along with China, Brazil and Mexico, had been identified as a growing market and HSBC said it was willing to commit up to $1 billion.

At the time, HSBC CEO Michael Smith, CEO, said, ôUTI Bank is a well managed local financial institution and our investment in it will give HSBC greater participation in IndiaÆs fast growing financial sector. With this new investment we aim to strengthen our presence in India."

Analysts noted that June 2004 was a momentous month for HSBC since it had also announced the acquisition of a 19.9% stake in ChinaÆs Bank of Communications for $1.75 billion. It seemed the bank was all set to consolidate its presence in AsiaÆs two largest economies, China and India.

The agreement with Actis involved the transfer of a 14.6% stake, with an agreement to transfer a further 5% after HSBC received permission from IndiaÆs regulators to hold in excess of 15%.

After the transfer of the second tranche, HSBC was then set to make a mandatory offer to UTI Bank's retail shareholders - triggered by its acquisition of more than 15%. Many speculated HSBC would also be first in line for UTIÆs 33% stake in the bank when it decided to exit.

But, HSBC did not get the requisite permission to acquire Actis' remaining 5% stake. Then in March, 2005, the RBI issued guidelines covering foreign banks.

These stated that between 2005 and 2009 foreign banks with branches in India were not allowed to own more than 5% of an Indian private bank. The only exception would be for under performing banks.

Despite intense lobbying from foreign banks, India's Ministry of Finance has not changed in this legislation. As a result HSBC said it hoped successive UTI capital issues would dilute it from 14.6% to below the RBI threshold. Indeed, UTI BankÆs March 2005 GDR saw HSBC diluted to 12.18%.

Actis had acquired a 28% stake in UTI Bank in 2001 at approximately Rs.34 per share and had always hoped to sell it on to a strategic investor. Indeed, it is rumored that UTI itself, during negotiations with Actis, had agreed to start scouting around for an investor to partner it in its banking subsidiary by end 2002.

Subsequent equity issuances by UTI Bank to Citigroup Venture Capital and Chrysalis Capital saw Actis diluted to about 20%. When HSBC could not secure the necessary permissions Actis sold its residual stake in the market in July 2004 with Morgan Stanley, Capital International and Rowe Price among the buyers.