CASE STUDY

ON

UNIT SCHEME 64
(UNIT TRUST OF INDIA)
Submitted in partial fulfillment of MBA Program 2011-2013

Submitted by:

Anuradha ghanshala Roll NO: 1005002

INTRODUCTION
UNIT TRUST OF INDIA
Unit Trust of India is a financial organization in India, which was created by the UTI Act passed by the Parliament in 1964. For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens. In mid- 1980s public sector banks were allowed to open mutual funds. The real vibrancy and competition in the MF industry came with the setting up of the Regulator SEBI and its laying down the MF Regulations in 1993.UTI maintained its pre-eminent place till 2001, when a massive decline in the market indices and negative investor sentiments after Ketan Parekh scam created doubts about the capacity of UTI to meet its obligations to the investors. This was further compounded by two factors; namely, its flagship and largest scheme US 64 was sold and re-purchased not at intrinsic NAV but at artificial price and its Assured Return Schemes had promised returns as high as 18% over a period going up to two decades.As of 2010, UTI has 10 million investors. Fearing a run on the institution and possible impact on the whole market Government came out with a rescue package and change of management in 2001.Subsequently, the UTI Act was repealed and the institution was bifurcated into two parts .UTI Mutual Fund was created as a SEBI registered fund like any other mutual fund. The assets and liabilities of schemes where Government had to come out with a bail-out package were taken over directly by the Government in a new entity called Specified Undertaking of UTI, SUUTI. SUUTI holds over 27% stake Axis Bank. In order to distance Government from running a mutual fund the ownership was transferred to four institutions; namely SBI, LIC, BOB and PNB, each owning 25%. Certain reforms like improving the salary from PSU levels and effecting a VRS were carried out UTI lost its market dominance rapidly and by end of 2005,when the new shareholders actually paid the consideration money to Government its market share had come down to close to 10%! A new board was constituted and a new management inducted. Systematic study of its problems role and functions was carried out with the help of a reputed international consultant. Fresh talent was recruited from the private market, organizational structure was changed to focus on newly emerging investor and distributor groups and massive changes in investor services and funds management carried out. Once again UTI has emerged as a serious player in the industry. Some of the funds have won famous awards, including the Best Infra Fund globally from Lipper. UTI has been able to benchmark its employee compensation to the best in the market, has introduced Performance Related Payouts and ESOPs. The UTI Asset Management Company has its registered office at: UTI Tower, Gn Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051.It has over 70 schemes in domestic MF space and has the largest investor base of over 9 million in the whole industry.

It is present in over 450 districts of the country and has 100 branches called UTI Financial Centres or UFCs. About 50% of the total IFAs in the industry work for UTI in distributing its products! India Posts, PSU Banks and all the large Private and Foreign Banks have started distributing UTI products. The total average Assets Under Management (AUM) for the month of June 2008 was Rs. 530 billion and it ranked fourth. In terms of equity AUM it ranked second and in terms of Equity and Balanced Schemes AUM put together it ranked FIRST in the industry. This measure indicates its revenue- earning capacity and its financial strength. Besides running domestic MF Schemes UTI AMC is also a registered portfolio manager under the SEBI (Portfolio Managers) Regulations. It runs different portfolios for its HNI and Institutional clients. It is also running a Sharia Compliant portfolio for its Offshore clients. UTI tied up with Shinsei Bank of Japan to run a large size India-centric portfolio for Japanese investors. For its international operations UTI has set up its 100% subsidiary, UTI International Limited, registered in Guernsey, Channel Islands. It has branches in London, Dubai and Bahrain. It has set up a Joint Venture with Shinsei Bank in Singapore. The JV has got its license and has started its operations. In the area of alternate assets, UTI has a 100% subsidiary called UTI Ventures at Banglore This company runs two successful funds with large international investors being active participants. UTI has also launched a Private Equity Infrastructure Fund along with HSH Nord Bank of Germany and Shinsei Bank of Japan.

US- 64- The Genisis

The first scheme introduced by UTI was the Unit Scheme-1964, popularly known as US-64. The funds initial capital of Rs 5 crore was contributed by Reserve Bank of India (RBI), Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) and other scheduled banks including few foreign banks. It was an open-ended scheme, promising an attractive income, ready liquidity and tax benefits. In the first year of its launch, US-64 mobilized Rs 19 crore and offered a 6.1% dividend as compared to the prevailing bank deposit interest rates of 3.75 - 6%. This impressed the average Indian investor who until then considered bank deposits to be the safest and best investment opportunity. By October 2000, US-64 increased its capital base to Rs 15993 crore, spread over 2 crore unit holders all over the world.However by the late 1990s, US-64 had emerged as an example for portfolio mismanagement. In 1998, UTI chairman P.S.Subramanyam revealed that the reserves of US64 had turned negative by Rs 1098 crore. Immediately after the announcement, the Sensex fell by 224 points. A few days later, the Sensex went down further by 40 points, reaching a 22-month low under selling pressure by Foreign Institutional Investors (FIIs). This was widely believed to have reflected the adverse market sentiments about US-64. Nervous

investors soon redeemed US-64 units worth Rs 580 crore. There was widespread panic across the country with intensive media coverage adding fuel to the controversy.

THE SCHEMES FUNCTIONING

As the very name of the scheme suggests, the US-64 functioned in terms of units which small investors used to purchase from the UTI and sell back to the latter whenever they needed hard cash. In every calendar year, the transactions used to start in July after the UTI declared the sale and repurchase prices of its units. Sale price meant the rate an investor paid to purchase units from the UTI, and repurchase price was the rate at which he could sell his units back to the UTI. These prices used to appreciate month by month, they were duly notified through newspaper ads, and the transactions used to be closed at May-end next year. The month of June was reserved for bookkeeping and calculation exercises within the UTI, after which it used to declare a rate of dividend for its investors.

To illustrate it concretely, let us take the example of the July 1994-June 1995 period --- the year just before the US-64 suffered its first major jolt at the hands of a leading corporate house of the country. In July 1994, as in previous years, the UTI offered to the investors US64 units at a premium --- at Rs 15.30 per unit against the book value of Rs 10 per unit. As in previous years, again, the sale price of the units went on appreciating and had, for example, reached Rs 18.30 per unit in October 1994, only after three months. At the end of its transaction year, that is, towards the end of June 1995, the UTI announced a dividend of 26 per cent. Thus every unit of a book value of Rs 10 earned a profit of Rs 2.60, which meant that if a person had bought a unit at the actual price of Rs 15.30 in July 1994, he earned an interest of around 17 per cent after a year. The highest bank interest rate at that time was 13.5 per cent per annum.

After the end of June every year, the investor had two options before him. He could either get a cheque for the dividend accrued to him in the previous 12 months or he could reinvest the same, that is, get it converted into units and thus increase the number of units in his hand. In the latter case, the amount of dividend due to him automatically increased year after year, till he chose to withdraw money by selling his units back to the UTI.

BENEFITS TO INVESTORS

 BENEFITS TO INVESTORS

Compared to other instruments of investment, the US-64 offered several benefits to investors. First, as is evident from the above example, small investors found investing in US-64 units far more lucrative in terms of interest amount than putting their money in a bank.

Secondly, compared to some other instruments like Kisan Vikas Patras or National Saving Certificates, the US-64 offered its investors the benefit of a very high degree of liquidity. While ones money was locked in the above instruments for five to six years, a US-64 unit holder could sell his units back to the UTI any time in the year, save in the month of June, at the previously declared repurchase price. In any month, the repurchase price used to be only 15 to 25 paise less than the sale price, and did not mean any loss to the investor. After surrendering his units to the UTI, the investor got a cheque for his money in a week or so.

Thirdly, the US-64 was considered to be totally free from the risks of volatility that are associated with speculative investments. For about three decades since its inception, that is, as long as the US-64 money was not invested in stock market shares, the investors money was perfectly safe from the ups and downs (mostly downs) of the stock market. The investor had full faith in the US-64 units and thought that his money was safe in the custody of the "government of India."

Fourthly, contrary to the monthly deposit schemes run by the post office, some banks and even private organisations like the Peerless or Sahara, the US-64 investors faced no risk of forfeiting any part of their principal or dividend or both, in case of default in payment for a couple of months. This was particularly to the liking of those who had no regular or fixed income.

Fifthly, under the US-64, an investor was required to purchase a minimum of only 100 units; that meant an investment of only Rs 1500 or so. Thus, even those with modest incomes and savings could become members of the scheme.

Lastly, if a US-64 investor had two options before him, of getting a cheque for the dividend earned by him or of reinvesting the same into more units, the conversion from one option to

the other was not difficult in the least and could be effected through simple correspondence. This offered another attraction for the investors.

It was these factors that made the US-64 investments highly attractive for the investor community as a whole. The scheme, on the whole, was a haven for small investors, particularly those working in the private or unorganised sector, who did not have any security of post-retirement or post-retrenchment benefits. Factory workers, peasants of all hues, artisans, middle class employees, pensioners, hawkers, small shopkeepers and vendors, headload workers and even rickshaw-pullers --- all used to confide in the US-64 units, taking this form of investment as their best security in bad days. This is what explains the tremendous success of the scheme and the very high number of investors it attracted --- more than 20 million. This also explains how the US-64 alone accounted for about 23 per cent of the Rs 60,000 crore plus corpus of the UTI that runs a number of other schemes. In fact, no scheme of the UTI achieved such tremendous success as the US-64 did, making the UTI the biggest mutual fund of the country and one of the biggest in the world.

POINT OF DOWNFALL

But, then, it was the new economic policy of 1991 that hindered the so far smooth functioning of the US-64 and of the UTI as a whole. If the US-64 was hitherto a debt-oriented instrument, its fund managers now chose to make it equity-oriented. Deviating from its earlier path of investing in the fixed-income securities, these fund managers now turned into stock market players with a huge corpus of others money in their hands. Capitalising on the stock market boom of 1992 was their ostensible plea.

In this atmosphere of liberalisation, the US-64 suffered its first major jolt in 1995 when the UTI invested US-64 money in Reliance groups shares and the group offered it fake share certificates. However, when the media got scent of this bungling and some adverse comments came, the Reliance group offered to take back the fake share certificates and issue new ones in their stead. But the US-64 heavily lost in this process which involved a revaluation of the shares the UTI held. At that time, the involvement of UTI fund managers and its then chairman in the bungling was widely suspected. By that time, the Reliance group had also earned notoriety for some of its arbitrary actions. Those who had once purchased Reliance Petro shares were, for instance, later made shareholders in other companies of the group, without their consent. Nor did the Reliance Petro issue carry any clause informing the subscribers that such a conversion could be effected.

However, the UTI persisted in its new-found love for stock market investments. Even though another major mutual fund, namely the SBI Mutual Fund, had already gone under because of the stock market volatility, never to regain its earlier importance, the US-64 fund managers chose not to learn any lessons from it. As a commentator (Mantoo Banerjee, Unit Distrust, The Statesman, July 6) says, with an excessively huge corpus at its disposal, the UTI now acquired the power to make or break companies, and this is what made its fund managers "maverick and manipulable."

This was indeed the point from where the downfall of the US-64 started, and the scheme never recovered its earlier coveted status. Because of the volatility of the stock market, and after the dreamy phase of the 1992 boom was over, the net asset value (NAV) of the US-64 units constantly went downhill, finally turning negative in 1998. At that time, it was only because of a modest intervention by the government, that directed its public sector enterprises to invest in the US-64, that a semblance (and only semblance) of the US-64s recovery was created.

In this period, as the sale and repurchase prices of US-64 units were pegged to their NAV, these prices too registered a steady decline. Earlier, while the sale price of a unit used to start from Rs 15.30 in July and go up to above Rs 22 by May next, it now began to start from Rs 13.40 or so and never went beyond Rs 15.40. This was particularly depressing for small investors. For, a greater appreciation of the sale price meant a greater appreciation of the repurchase price at which the investors could sell their units back to the UTI mid-year, or a bigger dividend at the end of the year. As a result, in the last two years, the actual income from the US-64 units has even gone below what one could get from a bank deposit.

HOW THINGS WERE SET RIGHT

PSU shares were transferred to a special unit scheme (SUS99) subscribed by the government in 1998-99. Core promoters such as the Industrial Development Bank of India added around Rs 450 crore to the unit capital, thus helping to bridge the reserves deficit of Rs 2,800 crore in 1998-99. Portfolios were recast in the current quarter to capitalise on the stock surge as the BSE Sensex rose by 15%. Greater weightage was given to stocks such as HLL, Infosys, Ranbaxy, M&M and NIIT. In US-64s case exposure to IT, FMCG and Pharma stocks rose from 20.45% to 22.09%. This was replicated across funds. Between June 1999 - September 1999, 21 out of UTIs 28 schemes have outperformed the Sensex. UTI has become more proactive in fund management. For instance, it bought into Crest at between Rs 200 and Rs 210 in October 1999. The stock was trading at Rs 340 in November 1999. Stocks like Visual Software, Mastek and Gujarat Ambuja have entered the top 50 equity holding list. Scrips like Thermax, Thomas Cook and Carrier Aircon are out. Complete exit from illiquid stocks such as Esab Industries. The divesture of around 83 stocks released an estimated Rs 300-500 crore of extra investible cash. UTI constituted an ad-hoc Asset Management Committee with 7 members comprising 5 outside professionals and 2 senior UTI officials. The committees role was clearly defined and its scope covered the following areas: To ensure that US-64 complied with the regulations and guidelines and the prudential investment norms laid down by the UTI board of trustees from time to time. To review the schemes performance regularly and guide fund managers on the future course of action to be adopted. To oversee the key issues such as product designing, marketing and investor servicing along with the recommendations to Board of Trustees.One of the most important steps taken was the initiative to make US-64 scheme NAV driven by February 2002 and to increase gradually the spread between sale and repurchase price. The gap between sale and repurchase price of US-64 was to be maintained within a SEBI specified range. UTI announced that dividend policy of US-64 would be made more realistic and it would reflect the performance of the fund in the market. US-64 was to be fully SEBI regulated scheme with appropriate amendment to the UTI Act. The real estate investments made by UTI for the US-64 portfolio were also a part of the controversy as they were against the SEBI guidelines for mutual funds. UTI had Rs 386 crore worth investments in real estate. UTI claimed that since its investments were made in real estate, it was safe and it could sell the assets whenever required. However, the value of the real estate in US-64s portfolio had gone down considerably over the years. The real estate investments were hence revalued and later transferred to the Development Reserve Fund of the trust according to the recommendations of the Deepak Parekh committee. By December 1999, the investible funds of US-64 had increased by 60% to Rs 19,923 crore from Rs 12,433 crore in December 1998. The NAV had recovered from Rs 9.57 to Rs 16 by February 2000 after the committee recommendations were implemented.

References

http://en.wikipedia.org/wiki/Unit_Trust_of_India http://www.mutualfundsindia.com/unit.asp