Beruflich Dokumente
Kultur Dokumente
habits among them; to bring to the common man the prosperity of the
capital market at minimum risk, through the habit of investing in Units.
and utmost care for the saving of investors. To develop in each and every
member of UTI the highest degree of self-esteem and pride that we are
UTI was set up under the UTI Act, 1963. It commenced its operations
from its July 1964. It was created to spread investment consciousness to
the investors. UTI has grown into India’s largest institutional investor in
the corporate sector.
ORGANIZATION STRUCTURE
Scheme (Unit Scheme 1964) which was outlined in the Act itself, certain
institutions were required to contribute to the Scheme’s initial capital,
Banks including few foreign Banks. Under the Act the initial capital
contributors to the US ’64 Scheme had been provided representation on
by IDBI. Board of Trustees does not include any employee. Thus, the
Board consists mainly of representative /nominees of the investors to the
Since UTI does not have any share capital it operates on the principle of
“no profit no loss” as all income and gains net of all costs and
development charges ultimately go back to the initial capital contributors
In 1964-65, UTI mobilized Rs. 19 crore under US’64 Scheme. The Trust
Linked Insurance Plan (ULIP) which provided not only growth in the
value of investment for the contractual period of 10 years (15-year option
was introduced later) but also insurance benefit. By June 1980, with 4
offices UTI had been operating 6 different Schemes and Plans with an
units under US’64 Scheme had increased to Rs. 13.20 and Rs. 11.05
respectively.
During the eighties, UTI had introduced more than 20 new open-end and
Gains Unit Scheme 1983 (open-end), Children’ Gift Growth Fund 1986
(Open-end), Parents Girt Growth Fund 1987 (open-end), Income Unit
Master share (1986) as also 2 Offshore Funds (India Fund Unit Scheme
1986 and India Growth Fund 1988). By June 1990, the outstanding Unit
US ’64 alone accounted for unit capital of Rs. 7025 crores and investible
funds of Rs. 10,354 crores. The sales and repurchase prices of units
under US’64 had risen to Rs. 13.75 and Rs. 13.00 respectively. The rate
of dividend under US’64 rose to 18% in 1989-90.
Rs. 39,303 crores by June 1994. During the same period outstanding
unit-holding accounts increased from 65 lakhs to 103 lakhs and further
to 364 lakhs. Individual investor came into sharper focus during this
period. Investible funds increased from Rs. 17,651 crore to Rs. 21,376
crores and crossed Rs. 51,709 crores. The number of UTI branch offices
increased from 20 in July 1990 to 44 in June 1994. During July 1990-
Rajlakshmi UTI Scheme, Children’s’ College and Career Fund and Bhopal
Gas Victim Monthly Income Plan). At present, UTI manages 54 Schemes.
25% to 26% in 1992-93. The July sales and repurchase prices of US’64
in 1993 were Rs. 16.00 and Rs. 15.00 respectively. In July 1993 US ’64
unit-holders were given 2:5 Rights offer at a 20% price discount. The
Preferential and Rights offers brought in substantial rise in effective yield
to US’64 unit-holders. Also, during last 4 years period, all fixed income
Schemes have out performed their promises by giving higher capital
fund type scheme of UTI has provided compound rate of return 48% per
year for the last 7 ½ years of its operation. To the investing public UTI
of net asset value). Operating on the principle of “no profit no loss”, UTI
has been able to provide relatively handsome returns to unit-holders.
HIGHLIGHTS OF 1995-96
Mobilization of Rs. 8.227 (Rs. 6,373 face value) crore from 105 lakh
fresh unitholding accounts under eight new schemes (all closed-end)
Meeting rep--- and redemption of units of the value of Rs. 11.57 (Rs.
7,643 face value) crore
Dividend rates Under ULIP (16.5%), CRTS (18%) and GCGI (13%)
maintained at the previous year’s level.
respectively.
Between July 1, 1995 and June 30, 1996 while the BSE National
6.4% to 25.8%.
(Rs. in cores)
Year Sales Outstand Out Investibl Reserves Cross Cross Income
u i s e & I E D
n n t F P n x is
d g a u r c p tr
e u n n o o e i
r n d d v m n b
a it i s i e d t
ll c n s it u
S a g i u ti
c p u o r o
h it n n e n
e a it
m l h
e o
s l
d
i
n
g
a
c
c
o
u
n
t
s
(i
n
l
a
k
h
s)
* High sales was due to the encouraging response to equity oriented schmes
which mobilise about Rs. 7000 crore.
FUND DEPLOYMENT PATTERN
Over the years, the fund development pattern has considerably changed. In the initial
years, equity share s accounted for about 40% and preference share 8%, the rest being
3% and debentures to 26%. But share of deposits with corporates and other loans
increased to 25% and that of money market instruments to 21%. By the end of 80s, the
market instruments 20% and Government securities 18%. At present, the broad
distribution of investible funds is: Equities 49.95%, Debentures 24.63%, Loans and
Deposits 87%, Government securities 11% and Money Market Instruments 6%. The
trend is towards equity in line with growing interest in equity amongst investors.
liquidity to meet repurchase and dividend payment needs. Need for liquid
fund increased also because of the increased number of maturing fixed –
Under the Act, UTI has been provided with wide scope of business.
Besides selling and purchasing units, UTI is authorized to invest in
banking and investment advisory services, buy / sell and deal in foreign
exchange and doing any other kind of business connected with
UTI ASSOCIATES
UTI-SEL’s clients include large domestic institutions, Mutual Funds, FIIs and fairly a
large number of retail clients. In its seeking business it achieved an impressive turnover
of Rs. 1266 crore on the capital market segment and Rs. 1483 crore in the debt
segment. For the first full year of operation in 1995-96, it reported a net profit of Rs. 1.5
with the year-end deposits reaching Rs. 926 crore and the advances Rs.
557 crore. It reported a profit of Rs. 11.21 crore (Rs. 2.3 crore in 1994-
95). The Bank is a member of SWIFT User Group in India and has got
permission from the DOT to set up its own leased line called UTI-Bank
next one year to provide focused service to investment. During the year,
UTI-ISL earned gross income of Rs. 2.18 crore and made net profit of Rs.
3.3 lakhs.
to UTI’s India Growth Fund, made a net profit of Rs. 70.70 lakhs in
1995-96, as compared with a net profit of Rs. 115.17 lakhs in the
previous year.
special offers, as also tax benefits. All these benefits makes US-64 a
GOOD BUY for all category of investors throughout the year.
Societies, Bodies Corporate, Companies and Banks as also for the benefit
of Mentally Handicapped Adult.
The face value of each unit under the Scheme is Rs. 10/-. Application
Though the face value of unit is Rs. 10/- per unit, actual sale and
repurchase will be effected at the sale and repurchase prices fixed by the
The Scheme has a history of paying consistently attractive income as is evident from the following chat.
1990-91 19.50
1991-92 25.00
1992-93 26.00
1993-94 26.00
1994-95 26.00
Over and above the income, US 64 holders have also been offered
additional benefits like:
In the year 1994 1:5 Rights offer @ Rs. 14.80 at a 20% discount
15/-
UGS 5000 Bonus
1:5 Bonus on 4th Oct, ’95 O/S Units
And rights
1:1 Rights units on the enlarged capital issued
at par
In the year 1996
1:10 Bonus
In the year 1997
1:1 Rights at par in April 1997
UGS 2000 Rights
If gains of all these exclusive offers are taken into account, the return to
the US-64 holders works out much more than the income yield. However,
we may mention that there is no guarantee of past gains being repeated
in future.
LISTING
Units under the Scheme are listed on OTCEI, DSE and wholesale debt
segment of NSE.
TAX GUIDE
For individuals
the Trusts including “US-64” will enjoy deduction from income upto an
overall limit of Rs. 15,000/- under Section BOL of Income Tax Act, 1961.
Any long term capital gains arising out of the investment in Scheme will
be subject to treatment indicated under Sections 48 and 112 of the
Income Tax Act, 1961. Value of investment in units under the Scheme is
date of acceptance.
date of acceptance.
Units are approved securities under Section 11(2)(b) of the Income Tax
Act, 1961. Eligible Trusts investing in units will, therefore, quality for
Under Section 194K of the Income Tax Act 1961, UTI will be required to
Scheme, if such income exceeds Rs. 10,000/- during the financial year.
investment.
4. Attractive returns
5. Maturity bonus.
the period of the Plan. The minimum target amount of investment is Rs.
6,000/- and maximum Rs. 75,000/-. The largest amount can be in
multiples of Rs. 1,000/-, 1,500/- for the 10/15 years period respectively.
Every year one have to will contribute a fixed sum of money during the
period of the Plan. This amount in turn is used to pay a small premium
to the Life Insurance Corporation and the rest is invested in Units which
earns an income which is also reinvested every year. At the end of the
Plan period one will be paid the cash equivalent of the Units standing to
For a 10 year Plan you have to be above 12 years of age and below 55
years and 6 months. If you want to join the 15 year Plan the upper age
limit is 50 years and 6 months.
Even if the person is physically handicapped the can join the plan
subject to a lapse of 5 years from the date of event and holding gainful
the Plan period then his legal heirs or the second person will be entitled
to receive the following.
TAX BENEFITS
Under Section 88 of the I.T. Act 1961, a tax rebated of 20% of the
Plan without contributing for minimum period of 5 years, the tax rebate
allowed under this Section will be withdrawn. The tax rebate for
contribution is available to the person as well as for the membership of
his spouse and/or children. Also under Section 80L of the I.T. Act 1961,
for income from ULIP, enjoy a deduction from income upto a limit of Rs.
15,000/-.]
Any long- term capital gains arising out of the Scheme will be subject to
treatment indicted under sections 48 and 112 of I.T. Act 1961. The value
of investments in Units under this plan is fully exempted from wealth
Tax.
The personal accident insurance cover is in addition to the life insurance cover. It is up to the maximum of
Rs. 30,000 irrespective of the number of membership or target amount. The amount of personal accident
insurance cover will be as follows:
due to accident
RETURNS EXPECTED
The plan has declared an income of 16.5% for last 5 years i.e. from 1993
to 1997. For the year 1997-98 the income declared is 16.5%. The income
so declared will be reinvested in further units after deduction of tax, if
any.
MATURITY BOUNS
On completion of the full plan period, you will receive a maturity bonus.
For a 10 year plan you will get a maturity bonus of 5% on the largest
amount and for a 15 year Plan it is 7.5% . If a member has paid all the
contributions under the Plan and dies in the last year before completing
Maturity Proceeds
Age at entry 10 Year Plan (Rs) 15 Year Plan (Rs.)
12-20 years 1,56,245.69 2,29,637.82
25 years 1,56,182.88 2,29,351.66
30 years 1,55,868.75 2,28,203.05
35 years 1,55,177.65 2,26,193.13
40 years 1,53,795.49 2,22,029.53
45 years 1,51,219.63 2,14,851.01
50 years 1,47,135.94 2,03,796.12
55 years 1,40,727.67 -
* on a Target Amount Rs. 75,000/-.
The children’s Gift Growth Fund is a gift that keeps growing with the
years. When the child becomes an adult, the gift matures. So the child
gets the money when the needs it most to pay for higher education, to
help set up a business or practice or to help set up a home.
The gift can be given by any adult i.e. parent, relative, friend, a guardian
The face value of each of these Units is Rs. 10/- and the gift can be given
in multiples to 100 Units. Units are sold at par at Rs. 10/- throughout
the year except when the books are closed during the month of June.
The minimum number of Units you can gift is 200. There is no maximum
limit.
INCOME DISTRIBUTION
There is an assured income@ 12% p.a. money becomes, more than 10.80
The gift matures when the child reaches the age of 21 years. Till then,
just nobody- not even parents can touch the gift or accumulation, which
ensures undisturbed growth of the gift till the child attains adulthood
and is in a position to handle it.. At maturity the child can deal with the
units independently.
0.25% of the fresh sales mobilised under the scheme every year shall be
Income from units under all schemes of the trust including ‘CGGF’ will
from units, during the minority of the Child, will be on either of the
parents whose income is greater. As the Child attains the majority, the
tax liability will be on the Child. Under section 194K of Income Tax Act,
1961 UTI will be required to deduct income tax at source @ 15% from
the income payable under the Scheme to the donee child., if such income
exceeds Rs. 10,000/- during the financial year.
The Gift Tax Act, 1958 has abolished the levy of gift tax in respect of gifts
made on or after 1st October 1998. Thus, fifth of units of UTI are fully
exempt from levy of GIFT Tax without any upper limit General.
UTI BOND FUND (UBF) is an open ended pure debt scheme. The
objective of the Scheme is to provide attractive return to the investors
market instruments. The income and growth will be ploughed back and
reflected in Net Asset Value.
UTI Bond Fund was initially offered for sale from 4 th May, 1998 to 17th
June, 1998. The Scheme has now been made open ended from 18 th July,
1998. The sale of units under the Scheme will be kept open throughout
the year except during the book closure not exceeding 45 days in a year.
The face value of a unit under the Scheme is Rs. 10/- Sale price will be
the applicable NAV on daily basis without any sales load. Applications
should be for a minimum of Rs. 10,000/-. There is no maximum limit.
Sale/Repurchase at NAV all the year round. For repurchase before one
NAV of the fund will be declared daily and will be available on the next
day.
INVESTMENT OBJECTIVE
market instruments.
EXPENSES
(i) On the first Rs. 100 crores of average daily net assets – 2.25%
(ii) On the next Rs. 300 crores of the average daily net assets – 2.00%
(iii) On the next Rs. 300 cores of the average daily assets – 1.75%
(iv) On the balance of the assets – 1.50%.
(i) Happening of any event which in the opinion of UTI requires the
Scheme to be wound up.
(ii) 75% of the members pass a resolution that the Scheme be wound
up of
Such winding, if so, shall be with due notice to SEBI and in newspapers
TAX CONCESSIONS
Tax benefit U/Ss. 48 & 112 of Income Tax Act, 1961 on capital gains
Tax Act, 1961 subject to the provisions of lock in –period under the said
sections.
5. UTI MEP 1999
The next to the series of ELSS schemes from UTI is now open. UTI has
consistently come out with such tax saving schemes for the last few
years and has been the largest accumulator of funds in the category too.
In accordance with the guidelines the fund aims at growth by investing
over 80 per cent of the funds collected in equity and related instruments.
The scheme has also made a provision for investment in derivatives, and
Since the scheme is under a lock in period for three years liquidity will be
available to the investor only when repurchases commence under the
scheme in the year 2002. Initial expenses upto a maximum of 6 per cent
will be charged to the scheme. Of the ELSS schemes launched in the last
January the fund is offered an incentive of 3.5 per cent. This has now
goes down to 2.5 per cent of the month of February, and will go down
UGS 10000, the growth internal fund from the unit trust of India has posted a good
performance so far. The fund launched in May 98 has appreciated by 18.3 per cent
while the sensex has in the same period declined by 15.63 per cent. The fund has over
50% exposure in Fast Moving Consumer Goods and close to 22% in Pharmaceuticals.
plastics. The scheme managed a subscription of close to Rs. 70 crore in its initial offer
period.
CRISIS OF US 64
unit holders, accounts for a third of UTI’s operations. The total corpus of
the other MFs taken together is less than one – fourth of the UTI’s.
deposit instruments like equity and corporate debt at a time when capital
markets were too underdeveloped in this country to undertaken this
task. Two years after it started of, the fund started facing its first crisis.
What happens when you buy a US –64 unit at Rs. 14 0. The face
value of Rs. 10 goes into the Capt. Account and the rest Rs. 4 goes
entire amount. After a year the value of the shares fall to Rs. 12 . The
fall in market value, Rs. 2, is debited from the reserves to provide for
Subramanyam’s claims
(b) Because UTI held large blocs of shares, they could be sold to takeover
tycoons or to the companies themselves at very high prices.
Anyone who keeps money in UTI today in betting not on the ability of
UTI to make good the losses, but on the willingness of the government
to guarantee that units will be bought back at the current repurchase
US- 64 owns equity in 1400 firms and since only A group stocks and
a few B group stocks are of any interest to the market now, the rest
are probably worth only a fraction of their quoted value.
(like a FI).
In the current crisis, UTI stepped into huge purchase to share it up.
offering.
COMMITTEE
the scheme.
to another entity.
UTI at a Glance
UTI's Mandate
The impetus for establishing a formal institution came from the desire to increase the
propensity of the middle and lower groups to save and to invest. UTI came into
existence during a period marked by great political and economic uncertainty in India.
With war on the borders and economic turmoil that depressed the financial market,
entrepreneurs were hesitant to enter capital market.
The already existing companies found it difficult to raise fresh capital, as investors did
not respond adequately to new issues. Earnest efforts were required to channelise
savings of the community into productive uses in order to speed up the process of
industrial growth.
The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that
would be "open to any person or institution to purchase the units offered by the trust.
However, this institution as we see it, is intended to cater to the needs of individual
investors, and even among them as far as possible, to those whose means are small."
His ideas took the form of the Unit Trust of India, an intermediary that would help fulfil
the twin objectives of mobilising retail savings and investing those savings in the capital
market and passing on the benefits so accrued to the small investors.
UTI commenced its operations from July 1964 "with a view to encouraging savings and
investment and participation in the income, profits and gains accruing to the
Corporation from the acquisition, holding, management and disposal of securities."
Different provisions of the UTI Act laid down the structure of management, scope of
business, powers and functions of the Trust as well as accounting, disclosures and
regulatory requirements for the Trust.
A Unique Structure
In February 1976, RBI's contribution was taken up by the Industrial Development Bank
of India (IDBI). The institutions were provided representation on the Board of the
Trustees of UTI. Under the provisions of the Act, Chairman of the Board would be
appointed by Government of India. The Board of Trustees overlooks the general
direction and management of the affairs and business of UTI. The Board performs its
functions based on commercial principles, keeping in mind the interest of the unit
holders under various schemes.
Since UTI does not have any share capital, it operates on the principle of "no profit no
loss" as all income and gains net of all costs and development charges ultimately go
back to investors of respective schemes.
Overview
Unit Trust of India (UTI) is India's first mutual fund organisation. UTI manages funds
amounting to Rs.49,655.57 crore being the market value of investments as on 28th
June 2002 (provisional) from 28.96 million investors under its 72 schemes. The faith
and confidence of investors stems from UTI’s commitment, as reflected in its long track
record of over three decades, to ensure its investors safety, liquidity and attractive yield
on their investments.
UTI was set up in 1964 by an Act of Parliament. UTI presently occupies a special
position in Indian capital market. With a servicing and distribution network of 54
branch offices, 266 Chief Representatives and about 67,000 agents, UTI provides the
complete range of services to its investors.
UTI has set up associate companies in the fields of banking, securities trading, investor
servicing, investment advice and training, towards creating a diversified financial
conglomerate and meeting investors’ varying needs under a common
umbrella.
More than thirty years have elapsed since the creation of the Unit Trust of India (UTI),
an institution which was conceived and which remains the one to channelise the
savings of the small investor into industrial development.
During these three decades UTI has become a household name, providing unit holders
a safe avenue for investment in a wide variety of funds and at attractive returns.
Management
Chairman
Shri M Damodaran
Executive Directors
Shri D S R Murthy
Shri B S Pandit
Presidents
Shri S K Dasgupta
Dr S S Nayak
Dr P P Shastri
Shri M Parameswaran
Shri M Sebastian
Shri K Madhavakumar
Shri A K Sridhar
Shri R Rangarajan
Board of Trustees
Shri S H Bhojani
Shri P N Shah
Shri R S Lodha
Shri D T Pai
Shri M R Mayya
Product Variety/Range
Apart from equity, debt and balanced schemes, UTI also manages schemes aimed at
meeting specific needs like:
* Low cost insurance cover (ULIP).
* Monthly income needs of retired persons and women.
* Income and liquidity needs of religious and charitable institutions and trusts.
* Building up funds to meet cost of higher education and career plans for children.
Reaching Investors
Individual household investors account for 99% of UTI's investor accounts and about
65% of unit capital of UTI schemes. Products are distributed through a marketing force
of about 67,000 commission-based canvassing agents trained to explain the products
and provide related service support to investors.
Today, these agents are supervised by 266 Chief Representatives who guide the
investors, organize, train and motivate the agents in their respective areas of operation
(specified districts).
Investors under various schemes of UTI are now serviced through 54 UTI branches, 183
collection centres and offices of 4 Registrar and Transfer Agencies appointed by UTI.
Besides there are 57 franchises offices, which accept applications and distribute
certificates to unit holders. UTI has set up its own associate company, UTI-Investor
Services Limited (UTI-ISL), to meet the growing needs of unit holder servicing.
UTI is also currently implementing a technology upgradation program, involving
networking of on-line computer systems at UTI's offices, and offices of Registrars and
Transfer Agencies. This would enable UTI to improve service quality significantly.
UTI inaugurated its first Touch Screen Kiosk on 29th October 2001. In the first phase,
static information such as NAV, sale, repurchase prices of the schemes, product details,
objective of the scheme and portfolios are available on the Touch Screen Kiosk at UTI’s
Lotus Court UFC. In the second phase, online investor query for various details on the
investment made with UTI, interfacing with investor databases on various schemes
using the existing browser based query system or generic system etc., will be
introduced. In the third and final phase, integration would be started on completion of
the data migration of all the schemes into the Generic System Database. It would
enable the investing public to do online financial transactions such as Sale, Transfer,
Repurchase, etc. of units using personalized Smart Cards / Debit Cards / Credit Cards
on various UTI schemes.
UTI publishes weekly / daily NAVs for all its listed schemes and offers a prospectus for
every scheme. It also publishes half yearly results for all schemes and releases
information on portfolio as also largest shareholding for growth schemes and Unit
Scheme 1964. UTI adheres to disclosure requirements specified by SEBI. As on June
30, 2001 out of 74 domestic schemes, 68 are fully compliant with SEBI guidelines.
Investment guidelines
Consistent with the UTI Act, investment decisions of UTI are guided by investors'
interests. While operations are guided by the UTI Act, 1963, investments are subject to
prudential exposure norms laid down by UTI regulations. It cannot invest more than 10
percent of a particular scheme corpus in the equity of any one company. UTI's
investment decisions are backed by inputs from independent groups set-up for equity
research and investment appraisal.
* UTI Institute of Capital Markets (1989)--the first such institute in Asia, excluding
Japan.
* UTI Investment Advisory Services Ltd (1988)--the first Indian Investment Advisor
registered with SEC, US.
Consistent with financial sector deregulation, UTI has plans to enter into insurance,
pension and credit rating businesses.
Global links
UTI pioneered the off-shore fund investment in Indian securities. The India Fund,
launched in 1986 as a closed-end fund, became a multi-class open-ended fund in 1994.
Thereafter, in 1988, UTI floated the India Growth Fund which is listed on the New York
Stock Exchange. Both India Fund and India Growth Fund have increased their corpus
through rights issues. Besides the Columbus India Fund, launched in 1994, UTI
launched the India Access Fund, an Indian Index Fund (tracking the NSE 50 index) in
1996.
UTI International Limited is a 100% subsidiary of Unit Trust of India, registered in the
island of Guernsey. This company was set up with the primary objective of
administration and marketing of various offshore funds managed by UTI as also to act
as the management company for these funds as required by the Guernsey Law. UTI
International Ltd has an office in London to market UTI's offshore funds to institutional
clients in UK, Europe and USA. It is also responsible for developing new products as
well as new business opportunities of UTI. This office also looks after ongoing investor
relations with foreign investors and has succeeded in greatly improving communication
between UTI and its clients and distributors abroad. UTI International Ltd has played
an important role in launching three new offshore funds of UTI - the India IT Fund Ltd,
the India Debt Fund Ltd and the India Public Sector Fund Ltd.
To cater to various needs of NRI investors based in the Gulf region, UTI has a branch
office at Dubai. The branch office covers all the six GCC countries viz. UAE, Oman,
Kuwait, Saudi Arabia, Qatar and Bahrain. The Dubai office of UTI Acts as a liaison
office between our NRI investors in the Gulf and UTI offices all over India. Besides
providing information on current and new schemes of UTI, it also co-ordinates with UTI
offices in India for all after-sale requests of unitholders/agents.
In the recent past, UTI has extended its support to the development of Unit Trusts in
other developing countries, like Sri Lanka and Egypt. Besides providing technical
advise, UTI also participated in the equity capital of the Unit Trust Management
Company of Sri Lanka.
Research strength
UTI has its own research set-up to deal with different areas. The areas of research
analysis cover macro-economy, capital markets, financial sector and mutual funds.
Industry and corporate performance are also covered by Equity Research.
UTI Institute of Capital Markets conducts training programmes for the financial
community and helps to develop modern and scientific approach towards investment
management. It also serves as a forum to discuss ideas and issues relevant to the
capital market besides publishing research papers relating to capital market.
The Unit Trust of India is hurtling from crisis to crisis. Just when people thought the
worst was over for the country’s largest and oldest mutual fund institution, a fresh
crisis — surrounding the shortfalls in its monthly income plans — has gripped it. In
fact, the latest round of problems UTI is wrestling with is more than just shortage of
funds. It concerns UTI’s very foundation, its ownership and, its “paternity”. The
Monthly Income Plan or MIP problem has not sprouted overnight. Ever since the mid-
nineties, a debate has been raging in the financial sector over whether the anachronism
of assured return schemes are to be continued with at all. But oblivious of these
warnings, UTI’s management, over the years, has been merrily launching such schemes
without bothering about the repercussions. In taking stock of the crisis that has
befallen UTI, it is necessary to clearly identify the problems, and what now needs to be
done in the interest of that one segment of the population for which UTI was set up in
the first place — the small investor.
It is, indeed, pathetic that today the country’s largest mutual fund
institution is faced with a situation where none, including the
government of the day, is keen to pick up the tabs for the huge shortfall
which the MIPs will face, estimated at around Rs 4,000 crore. The so-
called sponsors, particularly the Industrial Development Bank of India
which for long has been seen virtually as the mentor of the Trust, have
cited legalese and sought to opt out of paying for the shortfall in the
MIPs. And now, there are signals emanating from the finance ministry,
too, that it may not be very keen to foot the bill. For the thousands of
unit holders, what then does the future hold?
To my mind, the UTI crisis reflects equally poorly on the Securities and
Exchange Board of India, as it does on anyone else. For MIP-97 alone,
Sebi has recently ruled that the shortfall in that particular scheme must
be met from UTI’s Development Reserve Fund. But a decision on the
other MIPs has been kept for later. For some years now, despite the fact
that UTI was set up under an Act of Parliament in 1963, and began
functioning in 1964, Sebi, which acquired its own statutory powers only
in 1992, has been clearing its schemes. In 1996, assured return schemes
were stopped, but Sebi again allowed them to resurface in 1997, with the
shortfall guaranteed by the DRF of the Trust. It is, indeed, surprising
why Sebi chose never to envisage a situation where even the DRF may
run out of funds, which is certain to be the case this time. What happens
if the DRF itself has no money? Who steps in then? The market
regulator, typically short-sighted, presumed that the DRF would always
remain in the money and did not bother to address that issue when it
allowed such schemes to be launched again in 1997. Experts who have
studied UTI over several years agree that this is the result of a colossal
failure to understand UTI’s problems and their implications.
Without going into the merits of IDBI’s legal argument that it is not UTI’s
sponsor, it is worthwhile, however, to take a look at the enormous clout
it has enjoyed over the years in UTI. While appointing the chairman of
UTI, the government consults the IDBI. The UTI executive trustee or ET
is also an IDBI appointee. As many as four trustees on the UTI board are
IDBI appointees, while two are elected, one is from the Reserve Bank of
India and one each from the Life Insurance Corporation and the State
Bank of India. So, you have a situation where as many as five and a half
(if one took the consultative role in the appointment of chairman into
account) members out of 11 are those where IDBI has a role. Even in the
executive committee, the powerful body which takes daily decisions at
UTI, the chairman and ET apart, there are two trustees who are IDBI
nominees. Yet, IDBI is not a “sponsor”. Why? Because it bought the RBI
stake in UTI only in 1976, and was not involved in setting up UTI in the
first place.
Who, then, is UTI’s real parent? For years, the government and UTI’s
management have basked in the glory of millions of unit holders putting
in their hard-earned monies in UTI schemes in the clear belief and faith
that UTI is a government institution. And for decades, until the advent of
other mutual funds, UTI was instrumental in spreading the capital
market culture across the country. There’s also another interesting
point. Section 3 of the UTI Act says that the government shall “establish”
a corporation known as the UTI. And what does regulation 2(x) of the
Sebi mutual fund regulations say? It defines a “sponsor” as any person
who, acting alone or in combination with a body corporate, “establishes”
a mutual fund. Even if one takes the Sebi definition of the sponsor, the
government, which has “established” UTI, is its sponsor!
The point, therefore, is, having established UTI, reaped benefits from it
and having failed to prevent it from hurtling towards a precarious
financial condition, can the government now pretend it is not the
ultimate owner of the Trust? Sebi, under its new chairman GN Bajpai,
now has a lifetime’s chance of rectifying the regulator’s earlier error of
allowing assured return schemes to continue. Keeping in view the past,
and with an eye firmly on the future, Sebi must pass a clear direction
that the government is the ultimate owner of UTI and must, in whichever
way fit, meet the shortfall in the MIPs. This will go a long way in proving
Sebi’s independence as regulator, and the fact that it has the small
investor firmly in focus. Only that can undo the massive damage done to
the psyche of the small investor who, after years of being wooed by
government and UTI alike, finds himself out in the cold. As for the
existing, reluctant sponsors, their contributions to the capital would
have evaporated anyway. They should now be “freed”, and a new set of
entities brought in to run UTI in line with the realities of the market in
which it operates.
The Lok Sabha Speaker Mr GMC Balayogi announced in the house on Friday that the Joint Parliamentary
Committee on the stock market scam, headed by Bharatiya Janata Party member Prakash Mani Tripathi,
would also go into all matters connected with the Unit Trust of India.
Former Unit Trust of India chairman PS Subramanyam, the mutual fund’s suspended
executive directors and stock broker Rakesh Mehta were on Friday remanded to judicial
custody till August 7 by a special court which rejected their bail plea.
A steady rise in the redemptions of US-64 units of the Unit Trust of India was witnessed
on Friday after the Trust offered a new plan for redemption on Wednesday.
With the Unit Trust of India crisis playing havoc with public confidence, the Insurance
Regulatory and Development Authority seems to have decided to play safe on the
pension funds issue.
(Reuters) - The government may have to bail out the country's largest
mutual fund operator for a second year running because of a shortfall in
the value of guaranteed return schemes, analysts said on Thursday.
They said state-run Unit Trust of India (UTI), which stunned investors
last year when it froze redemptions from its flagship fund, may now face
problems with maturing assured return schemes hit by bad debt and
plunging stock markets.
But analysts are debating whether UTI, which manages nearly half the
fund industry's $20 billion of assets, will be able to find the money for
the redemptions or whether the government will have to bail out the fund
again.
UTI's new woes centre around its 16 assured monthly income plans
(MIPs) and a fixed-return scheme. Two MIPs and the fixed-return scheme
mature on June 30 and three more MIPs mature later this year.
The 16 MIPs offer assured monthly or yearly income for one to seven
years, and a few also guarantee repayment of the initial capital at par or
the market value, whichever is higher.
POOR INVESTMENTS
But mutual fund tracking companies, which have seen the makeup of
Bombay-based UTI's assured return scheme portfolios, say many of their
investments are in doubtful debt.
It later agreed to redeem US-64 units at a price above the market value,
bankrolled by the government. But it set a ceiling on the amount
investors could redeem.
UTI has declined to reveal the gap between its combined redemption
obligation for the first three schemes maturing and their market value
but analysts estimate the shortfall at 6.83 billion to 10.5 billion rupees.
Value Research estimates the total shortfall for UTI's 16 MIPs at more
than 35 billion rupees.
Damodaran said UTI can draw on its development reserve fund (DRF),
worth around 8.5 billion rupees, which consists mainly of fees it takes
for managing its 80-odd schemes and some real estate assets.
"As and when these schemes come up for redemption...the DRF will have
the money to make good the shortfall," said Damodaran, appointed by
the finance ministry after the previous chairman resigned following the
US-64 scandal.
Analysts say between 3.81 and 41.63 percent of the assets in UTI's
various MIPs are "non-performing".
Debt in India "is considerably less safe than in countries with a fast
judicial system because bad asset recovery is cumbersome here," said
independent financial analyst Devangshu Datta.
While UTI may be able to use the reserve fund to meet redemptions later
this month, the reserves may not be sufficient for all its MIPs, analysts
say.
"Initial schemes will be honoured and the rest will depend on the
markets or possibly on government support," said Sandeep Parwal,
director at SPA Capital.
"The government will eventually have to bail out UTI for a variety of
reasons, the primary one being the unambiguous guarantee of capital
and returns in many cases," said Kumar.
In any event, analysts say UTI should not have promised assured
returns.
"Equity and debt are unpredictable and do not provide a platform for
guaranteed returns," Kumar said.
MUMBAI, JULY 24. The Unit Trust of India will be adopting a three-
pronged approach to resolve the current imbroglio which has engulfed
the largest mutual fund manager in the country.
Speaking to `The Hindu' today, Mr. Damodaran said, ``My basic priority
is to create a climate of confidence and to empower officers to do their
assigned jobs. We have already made a few changes in this regard.'' UTI
has brought back Mr. A. K. Sridharan, general manager, in charge of its
equity research cell who advised the top brass against investing in
Cyberspace Ltd. He was transferred to the zonal office following this
recommendation.
UTI is also getting a software specially developed for it which will help the
Trust to service all the unit holders under the 84 schemes and future
schemes that may be launched from time to time. This software will also
help marketing through branches to customers by offering other
products changing the format of branches. Currently the branches
undertake marketing as also back-office services to the unitholders. The
focus of branches will be now be changed to ``investor-centric'' services
and marketing of UTI schemes. The new information technology system
will recognise investors if they provide basic details like name and
address rather than recognising investors by certificate numbers.
UTI is also setting up kiosks at its branches. The pilot project has
already commenced. These are touch screen kiosks and will give
information about UTI schemes in different languages. In the first phase
UTI will give information about products. In the second stage it will give
account information and in the third phase transaction facility. It will be
initially launched in the branches and after successful implementation
``we intend to keep this kiosks at shopping centres, hotels, railway
stations and airports, thus providing round-the-clock access.'' In the
next one month UTI would be installing these kiosks in Mumbai and
later in a phased manner in other parts of the country.
So the government finally did stand by the Unit Trust of India. After several weeks of
acting indifferent and trying to pretend that UTI was nobody’s child, the Government of
India gave the guarantee on the back of which UTI could raise the Rs 1,000 crore from
the State Bank of India to tide over the immediate crisis of the shortfalls in its assured
returns schemes. This column has made it clear more than once that UTI is a
government entity and there is no alternative to a quasi-public sector role for the
institution, given its legacy and the constituency it serves. That, however, is not to
mean that it should not function as a business entity in tune with market realities. By
serving up the guarantee, the government has clearly indicated that whatever be the
legal position, UTI is indeed the child of the Government of India.
One year after the US-64 crisis broke, it is time to take stock of what’s
really happening at the country’s largest mutual fund. A year after the
Trust faced what was clearly its worst-ever crisis, UTI’s chairman M
Damodaran, who came in one Sunday afternoon last July to take charge
of the tottering institution after a distinguished stint as a turnaround
manager for the three weak public sector banks, has shown that the
government was, indeed, right this time in the selection of the candidate
for the top job at UTI. Though Mr Damodaran still won’t say anything
about his continuance at UTI, the finance ministry has already given him
another two years to continue the work he has started at the Trust.
But despite this lengthy list of pluses, it’s not as if it’s smooth sailing
from now on. The worst is clearly over, but now comes the problem of
how to tackle the shortfalls in the remaining assured returns schemes
and the crucial issue of restructuring UTI itself. The government can
either provide a similar guarantee the next time round (after a clear
assurance once again that UTI will follow all the conditions), or can ask
financial institutions to provide the funds. But whatever the case, once
the government has taken the right step of standing by UTI and its
millions of investors, something similar can be expected the next time
round. On the issue of restructuring, this column had earlier pointed out
that privatisation is not a feasible alternative. What is required, now that
UTI is gradually getting back on track, is to ask the cash-flush
institutions like the Life Insurance Corporation and some others to chip
in and set up the asset management company and ensure UTI is run on
lines like any other mutual fund. Mr Damodaran and his team at UTI
have already proved to the finance ministry that it was not wrong in
backing UTI in its time of crisis. UTI’s large family of investors will be
hoping that the new finance minister, Mr Jaswant Singh, continues to
repose the same faith in the Trust which his predecessor, after some
initial reluctance, showed in the institution
FOR millions of investors, India’s biggest and oldest manager of mutual
funds, Unit Trust of India (UTI), has shed its middle name. On July 2nd
its open-ended fund, US-64, with assets of 127 billion rupees ($2.7
billion), suspended sales and purchases of units—until January, it said
—in a move prompted by falling share prices and the exit of some large
investors.
The result: around 20m furious investors, with allegations of
mismanagement hurled at the government, which controls UTI. The
government promptly sacked UTI’s chairman, Pavagada Subramanyam.
And the finance minister, Yashwant Sinha, promised a partial rescue for
small investors, the details of which were announced on July 15th.
Under the rescue plan, investors can sell up to 3,000 of their units to the
fund, from August 1st. There is a government-supported floor price,
which rises the longer investors stay with the fund. Otherwise, the
government fears a crash, since the 37-year-old fund has holdings in
many of Bombay’s listed companies. UTI’s new chairman, Meleveetil
Damodaran, says the fund might sell shares privately rather than on the
open market.
Persuading investors to stay in the fund will not be easy. Those who
stayed after the previous government rescue, three years ago, have lost
money. That rescue came after a government-appointed expert panel
suggested that US-64 should be restructured as a bond fund; today,
about two-thirds of its portfolio is still in shares. Another suggestion,
that the fund should be regulated on a par with India’s private funds,
was ignored. Lack of regulation seems to have encouraged its managers
to make risky investments.
US-64 failed to adapt to a changing market. Interest rates fell after
financial deregulation in the mid-1990s, and the fund invested heavily in
shares in an attempt to boost returns. Even as the market fell, the fund
continued to quote unit prices above its net asset value. Many now fear
another shock when it declares the market value of its assets next
January.
The fund’s rescue underscores the nature of the moral hazard that
comes from the government’s control of India’s biggest financial
institutions, including the banks and insurance companies. Most of
India’s household savings—around one-tenth of GDP—are locked into
these inefficient and poorly managed institutions. Capital allocation and
the economy suffer as a result.
The government has taken some steps to reduce its role. Privately
managed mutual funds (unit trusts) have cut UTI’s share of the market,
from over 90% to 57% today. Several foreign insurers have set up shop
this year. In March, Mr Sinha cut the fixed returns on government-
managed pension funds. The next step should be to deregulate pension
funds and let private managers run them. A smaller US-64 may, in the
end, prove no bad thing.
JPC MAY HOLD SINHA RESPONSIBLE FOR UTI FIASCO
Taking the government to task for rushing through the Unit Trust of
India Ordinance without waiting for the report of the Joint Parliamentary
Committee on stock scam, senior Congress member Manmohan Singh
made a strong demand for restructuring of UTI and demanded protection
to millions of investors in the flagship US-64.
Moving a statutory resolution in the Rajya Sabha disapproving the UTI
(Transfer of Undertaking and Repeal) Ordinance, 2002, he said the
government should have waited for the JPC report before bifurcating UTI.
Singh said by choosing the Ordinance route, the government had
scuttled the process of eliciting the views of the members of Parliament
and obtaining an opinion from the Standing Committee of Parliament.
The former inance Minister said macro-management of the economy has
to share the blame for what happened to the UTI or the capital market
and citing the fall in Sensex, he said it was because of the government's
inability to manage expectations of the investing community.
While stressing the need for a holistic, more consistent and longer term
view of the entire matter to remove the uncertainty and instability of the
capital market, he favoured a medium term policy in this regard.
Referring to the proposed divestment of Nalco, Singh wanted to know if
there was any assurance that people who would take over the company
would not exploit natural resources beyond a certain limit and in a
manner which was harmful to the ecology. This was the idea behind
nationalisation of coal mines, he explained.
He said millions of people, mostly the retired persons, widows and
charitable trusts, which had invested in the US-64, were bewildered as
they had suffered huge losses. "What is happening in UTI has shaken the
confidence of the investors," he said pointing out at the sharp decline in
the dividend rate of UTI after 1996-97 and the fall in its Net Asset Value.
Singh asked the finance minister to assure the House that the Bill
seeking to replace the Ordinance, moved by him, did not foreclose the
options of restructuring UTI.
The Congress member wanted to know the mode of running UTI-I,
because even after bifurcation of UTI, a large portfolio remained with the
Unit-I scheme and people wanted an assurance that the portfolio would
be properly managed.
He said the Unit-II scheme should be Sebi compatible and added a fiscal
and monetary system, which instilled confidence in the minds of
investors was needed to give a new dynamism to the country's economy.
GOVT MAY CONSIDER UTI-II DIVESTMENT AFTER 3-5 YEARS: FM
The government on Thursday assured the Lok Sabha that there was no
attempt to bailout Unit Trust of India as Opposition members pilloried it
for ''mismanagement'', saying the small investors were the worst hit.
Moving the Unit Trust of India (Transfer of Undertaking and Repeal) Bill,
which seeks to replace an Ordinance in this regard promulgated on
October 29, Finance Minister Jaswant Singh said: ''there is no bail out of
UTI''.
While it was thought necessary to honour the commitments made by the
UTI to its investors with regard to the US-64 scheme and assured return
schemes, it was also decided to restrict the central government's liability.
The Centre had also decided to distance itself from the UTI by bifurcating
the UTI into two parts -- Unit-1 comprising of the guaranteed portion and
Unit-2 comprising of all net asset value based schemes --and repealing
the UTI Act of 1963.
In a statutory resolution disapproving the bill, Basudeb Acharia, CPM,
deprecated the government for coming out with the Ordinance on the eve
of the Parliament session. It was ''unwarranted' and not in the interest of
the country, he said.
He wanted to know why UTI had been split into two, one exclusively
under the control of the government and one left to the financial
institutions. ''This is a step towards privatisation of UTI,'' he said.
Congress member E M S Nachiappan said the UTI mess was a result of
the mismanagement of the NDA (Natioanl Democratic Alliance)
government.
The Bill provides transfer and vesting of initial capital of the UTI to the
central government, and refund of the initial capital to initial
contributors to such extent "as it may determine having regard to the
book value and assets and liabilities of the UTI."
It also provides for exemption to the specified undertaking from Income
Tax for five years.
Singh said over a period of time, certain weaknesses had crept into the
UTI. He said high dividends and sale and repurchase price of units
unrelated to the actual earnings and other shortcomings in UTI's
working had led to fall in the NAV of the units.
''These inherent weaknesses coupled with the problems of the capital
market in March, 2001, resulted in US-64 Scheme facing substantial
redemption during the months of April and May, 2001, forcing temporary
suspension of the sales and repurchases'' under this scheme for a period
of six months up to December last year, he said.
Subsequently, a limited repurchase facility was allowed in the interest of
investors. He said the central government had decided to meet the
difference between the administered repurchase prices and the NAV.
However, in view of the depressed capital market, the problems of the
UTI persisted, Singh said.
Supporting the measure to repeal the UTI Act as it would help small
investors, Priya Ranjan Dasmunsi (Cong), however, attacked the
government saying lack of vigilance by it led to the fall of UTI.
CRISIL PEGS UTI BAILOUT BELOW RS 14,000 CRORE
A Crisil report says the overall amount required to bailout the Unit Trust
of India would be much less than the around Rs 14,000 crore (Rs 140-
billion) already committed.
According to the Crisil Centre for Economic Research mid-year outlook
for 2002-03, the nature of the schemes being bailed out, the timing of
their redemption as well as the direction of the asset markets will
determine the burden on the exchequer.
It may be recalled that the government's rescue package is directed at
two set of schemes: the assured return schemes, which assure terminal
capital and a fixed dividend, and the Unit Scheme 64.
In the case of US-64, UTI would be redeeming its units at an average
price between Rs 10 and Rs 12 under its special administered price for
holdings of up to 5,000 units.
The Crisil study says that this price works out to Rs 11.40 depending on
the investor-mix and time of redemption.
The difference between the weighted average price and the current net
asset value is the shortfall per unit, which needs to be bridged under the
government's bailout plan.
The Crisil study adds that if US-64's equity portfolio rises by 141 per
cent in 2004 then the fund house will not require a bailout. In case the
scheme's equity portfolio gains 20 per cent, then the bailout package
would be just Rs 4,920 crore (Rs 49.20 billion).
In case the equity portfolio falls by 10 per cent, the bailout sum for the
government would rise to Rs 6,240 crore (Rs 62.4 billion). But if the
equity portfolio remains unchanged, the bailout package would be Rs
5,820 crore (Rs 58.2 billion).
"Would there be a sharp rise in the redemption in the first-half of 2003-
04? That seems somewhat likely but the government might mitigate the
redemption pressure by providing additional incentives to investors to
hold onto their US-64 units by giving significant tax sops both in the
next Budget," the report says.
Meanwhile, the 21 ARSs have had two problems, which have led to the
need for the government support. These schemes have promised returns
in the range of 13-14 per cent, while their actual earnings are between
7.5 per cent and 8.5 per cent.
Secondly, these schemes have the assurance of capital protection on
maturity. The Crisil report says that the important issue with the ARSs is
the timing of their redemption. These are spread over the next four years
and consequently the fiscal impact would be distributed over this period.
The cumulative amount to be provided to the ARS adds to Rs 1,332 crore
(Rs 13.32 billion) for 2002-03.
"If we use this redemption schedule for ARS to build the worst case
scenario for the current year (2002-03), then the total bailout in 2002-03
would be just Rs 3,390 crore (Rs 33.9 billion). If the scenario persists in
2003-04 and full redemption of US-64 happens, then the burden would
be Rs 6,800 crore (Rs 68 billion) in the next fiscal. These are clearly
extreme situations and the actual impact could be well smaller," the
report notes.
Finally, the direct impact of the budget would depend on the specific
mechanism employed for funding the bailout. There are two possible
models, the Crisil report says.
One is that UTI-I issues bonds to the government at a certain rate of
interest, say 7 per cent. This appears as a capital expenditure in the
budget and creates an asset.
But if UTI is unable to service the debt, it would entail a provision on the
revenue account.
Under the worst case scenario, this would be Rs 3,391 crore (Rs 33.91
billion) and Rs 240 crore (Rs 2.4 billion), respectively, in 2002-03. So, the
net addition to the expenditure in the 2002-03 Budget would be roughly
Rs 3,628 crore (Rs 36.28 billion).
In case UTI-I issues bonds to banks and financial institutions on the
back of government guarantees, then this would be a contingent liability
on the government's books and the impact on the expenditure would be
only to the extent of the interest payment guaranteed. This works to Rs
240 crore this year, Crisil says.
CENTRE TO GIVE UTI RS 450 CRORE FOR MIP 97
The Centre will provide an additional sum of Rs 450 crore (Rs 4.5 billion)
to meet the redemption pressure on monthly income plan-MIP 97(IV) of
Unit Trust of India, which has matured on Thursday.
The sum will take the aggregate support provided by the Centre to the
mutual fund major to Rs 950 crore (Rs 9.5 billion) in this fiscal, of which
Rs 500 crore (Rs 5 billion) had been provided to tide over the liquidity
problems of US-64 in the first supplementary budget. The additional
support will be provided in the second supplementary demand for grants
to be cleared by Parliament in the winter session.
The Centre has also provided a guarantee of Rs 1,000 crore (Rs 10
billion) for liquidating the assets in Development Reserve Fund of the
Trust to meet the redemption pressures for MIP-97(I) and (II) in April and
May and the MIP 97 (III) at the end of August this year.
To ensure that the holders of MIP schemes have an incentive to stay on,
the Centre has also held out the carrot of income tax exemption for five
years from the date the ordinance is notified.
The UTI (transfer of undertaking and repeal) ordinance 2002, issued by
the Centre says "no income tax or any other tax shall be payable by the
administrator (of the trust) for a period of five years, in respect of any
income, profits or gains derived or any amount received".
The tax benefit shall be applicable for the 25 schemes of the Trust that
will be administered by an administrator till they are liquidated.
The ordinance also says the administrator of the "specified undertaking"
shall be a person or a body of persons, who would run it on behalf of the
Centre. He would be assisted by a Board of Advisers whose term of office
and fees and others would be decided by the government.
The chairman, or any of the trustees would not be entitled to any
compensation for the premature termination of the UTI in its present
form.
On the issue of compensating the original promoters of UTI, the
ordinance has left the issue to the discretion of the Centre. It only says
the Centre would refund such amount as may be determined by it after
consideration of the book value, assets and liabilities.
TIMEFRAME FOR UTI-II SELL-OFF TO BE DRAWN UP
The Centre will enter into an agreement with the new asset management
company floated by the State Bank of India, the Bank of Baroda, Punjab
National Bank and the Life Insurance Company to fix a timeframe for its
complete divestment.
"The asset management company will only be a 'transitionary vehicle'
before UTI-II is completely divested," said a senior finance ministry
official.
The three banks and Life Insurance Corporation will contribute 25 per
cent each to the Rs 10-crore (Rs 100-million) paid up capital of the new
mutual fund.
UK Sinha, joint secretary, capital markets said, "It is not the
government's intention that UTI-II be a mutual fund managed again by
the public sector."
The President on Tuesday promulgated the Ordinances for repealing the
Unit Trust of India Act, 1963, and amending the Securities and
Exchange Board of India Act.
The Ordinance to repeal UTI Act will facilitate splitting UTI into two: UTI-
I to be managed by a public administrator and UTI-II, to be ultimately
privatised. The Ordinance to amend Sebi Act will give more teeth to the
capital market regulator.
According to Sinha, the finance ministry has also initiated a due
diligence exercise of UTI-II to decide the amount at which it should be
given to the new shareholders.
"The shareholders will also appoint an independent consultant to
undertake valuation of UTI-II," he said.
The valuation of UTI-II would take into account the quality of its assets
and the total assets under management besides its customer base.
The valuation is expected to be about 7-8 per cent of the assets under
management of UTI-II.
Sinha said the government will not wait for completion of the due
diligence exercise to transfer UTI-II to the new management led by the
State Bank of India, the Bank of Baroda, Punjab National Bank.
The ordinance to repeal UTI Act says there will be an appointed date
when UTI would be bifurcated. Till then, status quo will continue in the
state of affairs of UTI.
The moment the company is incorporated, the assets would be
transferred to it, he added.
The due diligence would be completed within a month or so, said Sinha,
adding that once the assets are transferred to the asset management
company, it would be for the new promoters to appoint a new team. The
chief executive would be appointed by them and his pay scale would be
market-linked.
"They will be able to hire the best talent from the market and there will
be no bar on the quantum of remuneration," said Sinha.
He also said the initial contributors to UTI's Rs 5-crore (Rs 50-million)
capital would be reimbursed. Based on the due diligence and valuation of
UTI-II undertaken by the new shareholders, the government would arrive
at a minimum price at which UTI-II could be divested.
Any amount realised over and above this could be shared by the
government and the four shareholders, he added.
The agreement entered into by the Centre with the new asset
management company would also take care of the compensation of the
four shareholders.
To a query whether any of these three banks or LIC, which have mutual
funds of their own, would be allowed to bid for UTI-II, Sinha said, we can
have a situation where they do not have a majority stake
KALAM PROMULGATES SEBI, UTI ORDINANCES
The ordinance to repeal the UTI Act was promulgated on Tuesday paving
the way for setting up of an asset management company for managing
the net asset value based UTI-II after the split of the country's largest
mutual fund within two months.
Along with the ordinance to repeal UTI Act of 1963, President A P J
Abdul Kalam also promulgated the ordinance to amend the Sebi Act for
providing extra teeth to the market regulator besides enlarging its board.
Following the issue of the ordinance, a notification would be issued for
setting up an AMC with a initial corpus of Rs 10 crore (Rs 100 million) by
Life Insurance Corporation, State Bank of India, Punjab National Bank
and Bank of Baroda with 25 per cent interest each.
The government would carry out a due diligence for UTI-II to enable its
privatisation by the proposed AMC, joint secretary (capital markets) U K
Sinha told reporters.
The chairman and top executives of the proposed company would be
appointed by the new management and the professionals would get
market-linked pay package.
Till the issue of notification for splitting UTI into two, the mutual fund
would continue its operation in the present form.
The equity held by IDBI, the leading stakeholder in UTI, along with other
financial institution and banks would be paid back.
UTI has an equity base of Rs 5 crore (Rs 50 millin) but manages assets
amounting to about Rs 42,000 crore (Rs 420 billion).
Sinha clarified that the AMC to be floated for UTI-II would be a
transitional arrangement and that NAV-based fund would be privatised
in a year or two.
"The proposed AMC floated by Life Insurance Corporation and three
public sector banks is only a transitional vehicle. We don't want UTI-II to
be PSU-run mutual fund," he said.
Sinha did not rule out the possibility of the present UTI chairman M
Damodaran continuing as the chief administrator of UTI-I after the split.
UTI-I would comprise of US-64, all assured return schemes, special unit
scheme of 1999 and the development reserve fund, which would together
amount to Rs 25,000 crore (Rs 250 billion).
UTI-II having about 25 NAV-based schemes has assets under
management amounting to Rs 17,000 crore (Rs 170 billion).
The government has already committed to a bailout package of Rs
14,561 crore (Rs 145.61 billion) to UTI to meet its liabilities on US-64
and other assured return schemes.
CABINET APPROVES ORDINANCES TO AMEND SEBI ACT, REPEAL
UTI ACT
With the NAV of the fund hovering at around Rs 6 per unit, it has to
register returns of around 100 per cent over the next nine months to
match the returns offered by the package. The possibility of this
happening is remote. An investor may thus be better off redeeming his
units at the earliest opportunity (May 2003) and investing the proceeds
elsewhere despite the lure of tax concessions that are being held out
now.
The tax sops that have been announced could have been more
innovative. For example, for investors who stay with the scheme for a
year or more, any capital loss could have been allowed to be set-off
against any income. Tax laws now allow set-off only against capital gains.
Or, investors could have been given a tax rebate based on the number of
years they choose to stay with the scheme beyond May 2003.
Innovative tax sops that would calibrate the redemption pressure on UTI
were the need of the hour. Such a package would have reduced the
adverse impact on the budget, taxpayers, industry and the capital
market. Unfortunately, the tax incentives are quite immaterial.
Action plan for US-64 investors
For unit holdings upto 5,000 units, it makes sense to stay put in the
fund for sometime (till May 2003), as your downside is protected with
assured repurchase price. You can sell only 5,000 units back to UTI at
Rs 11.30 in October 2002. This price is revised by 10 paisa every month
till May 2003, when its final repurchase price will be Rs 12.
The same plan would apply to investors holding more than 5,000 units.
For these units will be redeemed at an assured price of Rs 10 in May
2003. Keep a close eye at the NAV. Until that time if the NAV crosses Rs
10 -- then it would make sense to take a call on the opportunity. It looks
unlikely, based on portfolio performance alone, as the fund would need
to generate a whopping 69 per cent return from the current level of Rs
5.92 to reach its par value. Unless of course, the fund gets the difference
between the NAV and the assured prices before May 2003.
For MIP investors
The government's announcement that it would meet all the assurances
under the assured return schemes is a big source of relief for unitholders
in the monthly income plans, institutional investors schemes and special
schemes of UTI which carry an assured return, as capital protection is
now assured.
Today, broadly there are two kinds of MIPs -- one which guarantees
capital protection and return for the entire tenure; and the one which
guarantees capital protection but not the returns every year. So in most
cases, you will be better off by staying with the fund till redemption.
Given the promise that assured returns would be met, investors in all of
the assured return schemes should hold on to their current holdings in
the respective schemes till redemption date.
The NAVs of majority of the MIPs and the IISFUS now hover below par (in
some cases 30 or 40 per cent below Rs 10 per unit). An exit at NAV-
based prices at this juncture would mean taking large losses on
principal. A deficit of this order would be difficult to make up if investors
pull out now and invest in alternative debt avenues, as a bail-out is
available from the Government.
The government has indicated that the promised rate of assured returns
may be reset wherever possible. Even if the assured rates are reset at
lower levels, it will be prudent for investors to stay with the schemes, as
it would ensure return of capital, which is the most important
consideration at this point in time.
The shortfall
UTI is running 21 assured return schemes. Of these, 12 are full-term
assured for five years, five are with capital assured at maturity and four
are long-term full assurance schemes of 18 to 22 years' period.
If all the MIPs are allowed to live their full life, the Rs 8,561 crore will not
be enough to meet the shortfall. An internal assessment by UTI too
shows that the present value of this shortfall might touch a whopping Rs
13,739 crores
Mumbai: Unit Trust of India (UTI) said that the reforms package and financial
assistance of over Rs 14,600 crore announced by the government will help meet
investors' expectations, reinforce confidence in the largest fund manager and provide a
positive trigger to stock market.
The comprehensive package cleared by the government shows its commitment to stand
by the assurances given by UTI to the investors, its chairman M Damodaran said while
responding to the package programme.
Asked about splitting of fund into two companies-US-64 plus assured schemes and Net
asset value-based schemes-Damodaran said at present many NAV-based schemes of
UTI have been doing much better than the competitors from the private sector
especially the sectoral funds like petro and software.
UTI executive director B S Pandit said that the package for flagship US-64 and likely tax
concessions would provide the investors necessary incentive to remain with the scheme
beyond May 2003.
Another executive director D S R Murthy said that assured assistance would make a
difference to the market, which was apprehensive due to uncertainties and selling
pressure.
Association of Mutual Funds in India (AMFI) chairman A Kurien said that the package
has addressed the immediate worries of the investors who had reposed faith in UTI,
specially senior citizens who had invested their savings in assured schemes.
PTI
NAV price of US-64 shocks investors
Friday, December 28 2001 18:53 Hrs (IST)
Mumbai: A low Net Asset Value (NAV) announced by beleaguered Unit Trust of India
(UTI) for its flagship scheme Unit Scheme-64 (US-64) has come as a shock to more than
one crore investors as year draws to a close, casting a shadow on the mutual fund
industry.
"Such a low value at Rs 5.94 per unit and Rs 5.81 per unit under reinvestment plan came as surprise",
Association of Mutual Funds of India chairman A P Kurien said on December 30.
"This is likely to have an impact on investors perception but unit holders owning units upto 5,000 have
cushion of limited repurchase facility", Kurien said adding, "it is in their interest to hold onto their
investments till May 2003 when the assured repurchase price will be Rs 12 per unit".
The disillusionment was evident in the reactions of retired persons, housewives saying, "the part of our
money invested in the US-64 went to companies whose credentials were doubtful. It speaks poorly about
investment decisions".
With the NAV of Rs 5.81, our investments of Rs 50,000 (for 5,000 units of Rs 10 each) stands eroded to Rs
29,050.
The fund managers working with the private and bank sponsored institutions said NAV was worst than
expected and it was the worst nightmare ever seen by the financial sector.
On the prospects for improvement in value of theUS-64, fund managers said, "about 61 per cent of US-64
corpus is invested into equities and with cross-border tension mounting, sensitive index is unlikely to see an
upward movement".
The impact of low NAV on the market sentiments would be very less as this news had been factored in,
they said.
PTI
Chronology of the UTI crisis
Union Finance Minister Yashwant Sinha cannot pass the buck on to P S Subramanyam
after sacking him, argues Paranjoy Guha Thakurta
Union Finance Minister Yashwant Sinha is facing the biggest crisis of his
political career, thanks to his inept handling of another crisis, that is, the
one in the Unit Trust of India. Not just his political opponents, Sinha's
own party members are up in arms against him because of the manner
in which he has dealt with the freeze on transactions in the country's
oldest and largest mutual funds scheme operated by the UTI, the Unit
Scheme of 1964 (US-64).
Sinha has put up a brave front and claimed he will not put in his papers.
But his credibility is currently at an all-time low. Even his own
compatriots seem unwilling to take a charitable view of his role in the
US-64 imbroglio. With a committee of thirty-odd Parliamentarians
struggling to conduct an investigation into the recent stockmarket
scandal and with the Indian economy in a tailspin, few would like to step
into Sinha's shoes at this juncture.
This is exactly what the Finance Minister claimed: "I'm telling you with
full sense of responsibility that the Ministry of Finance was not taken
into confidence about the freeze on the sale and re-purchase of US-64.
Vital facts were not shared with the Ministry, neither by the board nor
the chairman of UTI."
He added that if he had ordered the UTI to postpone its board meeting or
delay declaring its financial results (the UTI's financial year ends on June
30), this "would have sent adverse signals to the stock markets and to
investors." The Finance Minister's explanation has failed to convince
many. It can be argued that he created a worse situation by first allowing
the UTI to declare that it would freeze US-64 transactions and then
stating that the government would review this decision after a big hue
and cry was raised.
Sinha may claim he is not passing the buck on to the sacked UTI
Chairman, but is he not doing just that? It now transpires that the UTI
had informed the Finance Ministry as early as May that the net asset
value (NAV) of US-64 had gone below the Rs 10 par value of the unit. Yet,
because of sheer negligence (or, perhaps, ineptitude), these warning
signals were either not communicated to the Finance Minister or he
failed to appreciate the significance of the fact that the country's largest
mutual fund had gone into the red.
During the initial years after the UTI was set up, the financial markets in
the country were hardly developed. To a considerable extent, the UTI
played a crucial role in India's capital markets and financial systems
reaching the kind of maturity these have in recent years. Things came to
such a pass that right through the 1970s and the 1980s, the UTI's
decisions to buy and sell would have an overbearing influence on the
sentiments prevailing in the
stock markets.
There are two broad categories of mutual funds of both types: income
schemes and growth schemes. A mutual fund can also be a mixture of
both income and growth schemes. Simply put, an income scheme aims
at providing an investor a steady return on investments (by way of
dividends) while a growth scheme aims at maximising the value of
investments by parking the funds in high-valued shares which bring
about capital appreciation and also though the issue of bonus shares.
US-64 was the first open-ended mutual funds scheme in the country. It
is open-ended in the sense investors can enter or get out of the scheme
at any point of time on the basis of sale and re-purchase prices which
are announced from time to time. It is this crucial element of the scheme
that got changed when the UTI board decided on July 2 to freeze re-
purchase and sale of US-64 instruments for six months.
During the initial years, the returns obtained by investors from US-64
were linked to the prevailing rates of interest. From the late-1970s, after
companies had to reduce their foreign holdings, the UTI started investing
progressively larger amounts in the equity shares of companies.
US-64 stands apart from other mutual funds schemes in one more very
important respect. It does not disclose its net asset value (NAV) which is
a figure that is made publicly available each and every working day. This
has been the single biggest criticism of the scheme over the decades.
Though the UTI is said to be making internal calculations of the NAV of
US-64, there figures have never been officially disclosed. Hence, the
scheme has had an "opaque" form of "administered pricing" of its value.
The UTI had constantly upped the dividend outgo for holders of US-64
from a low of 6.1 per cent in 1965 all the way to 26 per cent in the three
years between 1993 and 1995. It was for the first time in 1996 that the
dividend proportion was reduced to 20 per cent. It remained at that level
till 1998, coming down to 13.5 per cent the next year, going up slightly to
13.75 per cent in July 2000 and then down again to 10 per cent this
year.
The fact is that while the UTI does not assure or guarantee a specific
return, many (or most) investors in US-64 perceive the scheme to be not
only "safe" but also one which has almost assured "steady" returns. The
unwritten perception about the "safety" of the scheme is also an
important why investors react so emotionally whenever an adverse
announcement is made about US-64.
There has been no great uproar about the fact that the NAVs of mutual
funds schemes run by other government-controlled or public sector
bodies like the Life Insurance Corporation, the General Insurance
Corporation and the Infrastructure Leasing & Financial Services (ILFS)
are being quoted way below their par values. For example, the Rs 10
instrument of LIC's Dhan Sambriddhi was worth Rs 1.97 on July 10. On
the same day, the ILFS E-com instrument was being quoted at Rs 2.51
while GIC's Fortune '94 was worth Rs 4.93.
Of the total market for all mutual funds which is right now a little under
Rs 100,000 crore, UTI with its corpus of close to Rs 60,000 crore is by far
the biggest player in the game. Of the 87 mutual funds schemes operated
by the UTI, US-64 remains the biggest scheme accounting for roughly
one-seventh of the total market for all mutual funds. US-64 currently
comprises around one-fifth of UTI's total corpus - this figure used to vary
between two-thirds and three-fourths until as recently as 1997-98.
The first major crisis that took place in US-64 in October 1998 was on
account of the fact that "real" NAV of US-64 had fallen below the face
value of each unit (Rs 10) at a time when its re-purchase price was Rs
14.10 and its sale price was Rs 14.40. It was then reported that the
reserves of US-64 had fallen from a surplus of over Rs 6,000 crore in
June 1995 to a negative balance of Rs 1,000 crore three years later.
The share of equity in the total investments in US-64 had fallen from less
than 40 per cent in June 1994 to over 60 per cent four years later in
June 1998. In fact, the first crisis in US-64 was triggered off after the
then UTI Chairman Subramanyam had told a financial newspaper that
the Trust would be reducing its equity component in US-64 from around
64 per cent to 60 per cent.
This remark, together with a report that the watchdog of the country's
capital markets, the Securities and Exchange Board of India (SEBI), had
wanted to inspect the negative balance of US-64, had set off waves of
panic among investors. Later, the Union government announced a
bailout package which resulted in the transfer of some Rs 3,300 crore to
the UTI from the exchequer.
Nothing happened. The Union government did not accept these specific
recommendations of the Vaghul committee. After considerable dilly-
dallying, the UTI mangament itself "voluntarily agreed" to comply with
SEBI's regulations governing the working of mutual funds. But there was
a catch. The UTI agreed to bring under SEBI's purview only those mutual
funds schemes which had been started after July 1994. This clearly
meant that US-64 would continue to function the way it had since 1964
and would not publicly disclose its NAV.
However, as is its wont, the UTI took its own sweet time to act. This time
round, its plea was that yet another committee, this time headed by
chartered accountant Y H Malegham, had been instituted in July 2000 to
work out the modalities of the restructuring exercise that had to be
carried out in the UTI so that it would comply with the recommendations
made by the Deepak Parikh committee. This is a classic case of how
government organisations work: one panel is set up to implement what
another panel has recommended .
Nevertheless, the fact remains that till today, the country's largest
mutual fund, US-64, lacks the transparency that is mandatory for all
other mutual funds schemes.
To return to a point made earlier, over the years, the UTI had become
one of the largest (if not the largest) shareholder in a large number of
prominent, privately-managed corporate bodies. Even as late as three
years ago, it had been estimated that the UTI alone held as much as one-
tenth of all actively traded shares in the country.
The former UTI Chairman Subramanyam often used to talk tough about
selling its holdings in well-known companies to raise funds. But he never
carried out such threats. Perhaps, he was prevailed upon not to hammer
down the prices of prominent shares at a time when the markets were
distinctly bearish.
The working of the UTI is an example of the poor being robbed to pay the
rich. During the months of April and May this year, a small group
comprising large corporate bodies, banks and financial institutions
withdrew the bulk of their US-64 holdings worth over Rs 3,000 crore.
These organisations included companies in the Reliance, Tata, Bajaj,
Bombay Dyeing and Videocon groups, besides institutions like ILFS, the
Infrastructure Development Finance Corporation (IDFC), the Bank of
Baroda and the Bank of India.There are reports that Reliance alone
offloaded units valued at Rs 800 crore in these two months. Thus, these
bigwigs have got away selling their US-64 holdings at well above their
true market values (at prices in excess of Rs 14 for each Rs 10 unit)
while around 20 million small, helpless, middle-class householders and
pensioners are faced not only with the prospect of a freeze on sales but
also would have to bear the brunt of the price of each unit crashing
below its Rs 10 face value.
The Finance Minister has claimed that the government will not bail out
the UTI in the manner it did in 1998 when a sum of around Rs 3,300
crore was infused into the Trust. The question that remains unanswered
is what the government was doing to ensure that the funds belonging to
the people of India were judiciously utilised by the UTI?
More importantly, the fact is that right through the month of June there
could not have been any transactions in US-64 as this is the month the
scheme closes for book closure. Thus, if insider trading is to be
established, it has to be proved that someone knew more than one or two
months before the decision to freeze transactions was taken (that is,
during April and May) that the UTI board would, in fact, take such a
decision. This appears improbable.
As for the Finance Minister's other claim that the inquiry would look into
the so-called dubious investment decisions taken by the UTI in the
recent past, an impartial investigation has the potential of revealing
much that could prove to be rather embarrassing for the powers-that-be.
For instance, there are a clutch of media companies which received term
loans from the UTI. All these companies are headed by journalists who
are favourably inclined towards the ruling dispensation.
And guess the name of the person who was featured in this dubious
company's publicity material for having inaugurated its function? He is
none other than India's Prime Minister Atal Behari Vajpayee.
WHAT OUR SEC & ICB SHOULD LEARN FROM UTI CRISIS
The Financial Express, November 29, 2001
(What is the NAV of the ICB managed Mutual Funds in Bangladesh, does
any body, even the SEC, have any idea ? Unfortunately it is a big and
empathic NO !! Do we have any lesson to learn from here ?)
What went wrong with UTI and what best could have been done? If we
look back, we find that the seed of evil was planted when the manager
changed its asset allocation and shifted its weight towards equities in
mid?1990s. Later it joined the tech-boom and was late to quit before its
bust. Now the Scheme has 70 per cent of its assets in equity and it could
not finance the repurchases being unable to sell-off its equity stakes in
the bear market. Being an income scheme in nature, it should not have
shifted its allocation for speculative equities.
(Now if we just gloss over the new SEC Mutual Fund Rules 2001 of
Bangladesh what do we see ? The pundits sitting at SEC here who
essentially have no operational or even academic experience or
knowledge have now made it mandatory and compulsory for mutual
funds to invest 75% of their money in the riskiest 'secondary' market at
all times. The Rules is a 'wish list' which essentially serves not as a
'regulatory guideline' but a pathetic 'operating manual' !!! Is it not
regulatory interference ? Do we have something to learn here too ?.)
The all equity feature of all the funds are also worrisome. This structure
does not have any cushion against market plunge and would face the
fate similar to UTI if trapped in a selling wave. ICB should also think of
designing upcoming funds within the broad category of growth, income,
balanced or index fund.
The very name of UTI smacked of safety and handsome returns for the
multitude of Indian investors for over three decades. The organization
flourished under the erstwhile closed-regime in the absence of
competition. The US-64 crisis for the first time exposed the troubled
situation at UTI as a result of the competitive forces unleashed by the
deregulation of Indian financial markets. The dismal state of affairs at
UTI is a result of a number of factors. It is a classic case of a state-owned
organization perturbed by concomitant political interference, corruption,
lack of accountability and transparency, et al. The impractical and
populist financial measures perpetuated by the erstwhile socialist era
have added fuel to the fire.
The first section `Genesis of Crises' concentrates on the causes for the
first major crisis at UTI in the year 1998. In order to comprehend the
causes better, it provides an understanding of the functioning of US-64,
the flagship scheme of UTI and the largest mutual fund scheme in India.
The adherence to unsustainable practices such as arbitrary fixing of the
sales and repurchase prices, non-disclosure of the Net Asset Value (NAV)
etc. have led to the negative reserves and crises at UTI as elucidated in
the article `Basics of US-64'. The second major reason is that of
unsustainable levels of dividend pay outs, which UTI tried to uphold in
spite of the fact that the performance of the scheme did not support
them in the first place. UTI had been one of the most promising dividend
payers in the mutual fund industry. At one point of time it paid a
dividend of about 20 percent for four years in a row as observed by the
author of the article `US-64 : How did Dividends Contribute'.
UTI has a portfolio of more than 80 schemes in operation. The sheer
number of schemes makes it possible for UTI to operate inter-scheme
transfers and transactions, which are unhealthy governance practices at
their best. This tantamount to trading between the schemes inter se
rather than in the market place as discussed in the article `Other Affairs
at UTI'.
All these factors were contributing their bit to the impending downfall of
UTI and brought its reserves into the red in October, 1998. This was for
the first time in its thirty-year odd history that UTI found itself amidst
trouble and so deep into it that it had to come public with it and seek the
support of the government to bail it out from the crisis. The crisis put its
very credibility in question. The article `Credibility in Question', rightly
points out that UTI is on the verge of losing its credibility in the eyes of
the myriad investors who have parked their funds with it. The
government is left with little choice but to step in and prop up its ailing
prodigy since letting down UTI would be too much of a shock for most of
the investors, whose main criteria in investing in UTI was the fact that it
was state-run. But that would be far from a fitting end to the crisis and
the possibility of recurrence of such crisis in future. The article further
analyzes the various options that were open for the government to bring
UTI back into proper shape.
In the years that ensued, attempts were made to put a new lease of life
into the ailing giant. One such proposal was to divide UTI into smaller,
manageable units. This proposal remained on paper. The article `Losing
the Race' explains the plight of UTI in the face of competition. By early
2000, UTI was fast losing its market share in the Indian mutual fund
industry to the upcoming private mutual funds. Its market share
dropped from a virtual monopoly to around 60 percent levels. This was a
clear indication that UTI was losing its charm with the investor
community. The proposal to corporatize UTI too did not go beyond the
paper work and thus things at UTI were not far away from the way they
were prior to the 1998 crisis.
This time again there were plenty of warning signals that cautioned
about a major danger lurking in the corners for UTI and its 20 million
investors. The downfall in the equity markets and the ensuing bloodbath
in the information technology, communication and entertainment (ICE)
stocks hinted that UTI, which had taken positions in this segment at the
very peek of the euphoria would land in trouble. UTI had bought some of
the ICE stocks at sky-rocketing prices and the prices of these scrips were
constantly battered down soon after, thus eroding a lot of value from
these investments. Further the companies that UTI chose to invest in too
were questionable. All these issues and ample examples of UTI's
miscalculated decisions form the focus of the article `The Rot in UTI',
which was published much before the crisis came to light.
During the boom period of Indian equity markets during 1999 and 2000
UTI had ample opportunities to shift its US-64 scheme to an NAV based
price mechanism. The NAV of the scheme was higher than the
administered price at certain points during this period offering it a very
good opportunity to bring about the much-needed change. But UTI chose
to squander this opportunity. As a result of these short fallings UTI is
forced to shift US-64 to an NAV based mode and to an NAV that is less
than the face value of the US-64 units to the dismay of scores of its
investors. Further UTI did not maintain the desired proportion of debt in
the portfolio of US-64, which could have acted as a cushion during the
downfall in the equity markets. All this adds up to the mismanagement
of the scheme and was bound to bring about havoc at UTI. The article
`Missed Chances and Inexplicable Decisions' sheds light on these issues.
The next article, `Why UTI is Pushed to a Corner?' analyses how the UTI,
in spite of being the pioneer in the Indian mutual fund industry has been
far from being the forerunner of best practices. There are too many
clumsy issues that surround its modus operandi. The nexus between
politicians and corporate chieftains has led to brutal sacrifice of
investors' interests at the altar of other considerations. The sheer clout of
UTI made it a juggernaut whose moves would have enormous impact on
the market as well as the corporates in whose securities it invests. Any
offload by UTI of a company's stock was enough to scare the promoters of
dilution of their stake in the company. This had acted as a major issue
that propelled politicians to restrict UTI from doing so. The author opines
that the best solution to ensure independence is to privatize UTI.
The attitude of the government in handling UTI's crisis has not been very
appreciable either. There seems a lack of clarity in the policies of the
Government as to its interference in the affairs of mutual fund, in the
market-driven economy. The reluctance of the Government to let UTI
operate like any other mutual fund is not in tune with the market
reforms that successive Governments have been talking about. Moreover,
repeated bailouts by the government instead of leaving UTI to the market
forces, incentivise UTI to continue with its complacent attitude and the
investors to expect unrealistic returns and sovereign guarantee. The
article title `Crushed by Mistrust' provides insights into these issues.
The decision of freezing the sale and repurchase of US-64 units is bound
to have a long lasting impact on investors, markets and other mutual
funds too. The psychological impact of UTI's move would wipe out
investor's trust in the mutual fund industry as a whole. During the days
following the announcement of the freeze many mutual funds witnessed
heavy outflow of funds from their schemes. The author of the article,
`The Trust Busters', brings out these issues clearly besides questioning
the laxity of UTI. The decision to freeze comes as a severe blow to the
investors irrespective of the fact that UTI wants to underplay the
magnitude of such a drastic move. The author of the article `A Breach of
Trust' strongly opines that UTI had squandered the three years time after
the first crisis and has failed in preventing the second crisis.
The Road Ahead The fourth and final section of the book is `The Road
Ahead', which is a collection of articles that focus on the importance of
leaving UTI to the market forces. The articles are reactionary in nature
with authors commenting on the various issues and the possible
remedies that can be considered to get UTI back into shape. In a
significant departure from its customary pace, the government acted
rather quickly and forced UTI to come up with a remedial package as
early as fifteen days after the announcement. The chairman of UTI, P S
Subramanyam was unceremoniously sent off from his position. UTI soon
came out with a relief package, which is cleverly structured to reduce
redemption pressures. In addition the relief package relaxes the freeze
only for the 3000 units for each investor. The article `Regaining Trust?'
takes a critical view of the relief package as well as the necessity of
leaving UTI's survival to the forces of the market. The article strongly
argues that government should stop propping up UTI and would be well
advised to leave it to the forces of the markets.
After the announcement of the relief package UTI went ahead with a
publicity program intended to boost the confidence of investors but sadly
the facts that were omitted in the campaign were the most useful ones.
The article, ` US-64: Facts UTI won't Tell You' is a satirical comment on
the facts that are relevant for the investors but those that UTI would not
bother to disclose at all. Towards the end of the book the comments of
Prof. S B Mathur, IIM Lucknow, provide valuable insights into the whole
UTI fiasco and a probable way out.
The two major crises that have rocked the investors, drive home the
point that UTI should be left to the market forces rather than being
propped up by the government every time it goes under at an enormous
cost to the exchequer. The remedy to the problems of UTI is not full
protection but competition that would force it to mend its ways to
survive.