The Hindu : The UTI package — just the beginning

Online edition of India's National Newspaper
Saturday, Sep 07, 2002

Business

Business

The UTI package — just the beginning

By C. R. L. Narasimhan

The UTI package aims to reassure the investors at large.

The package for Unit Trust of India announced last Saturday is noteworthy on several counts. Some of them are readily recognisable. First, the unstinted support of the Government to make the restructuring exercise successful. Second, the restructuring effort itself goes much farther than what was visualised: the break up of UTI into UTI-I and UTI-II, which is at the basis of the package, has many implications. It is a decisive step to bottle up the problem ridden schemes in a structure in which the Government will have an even greater say. It also means that the Government will assume direct responsibility to fund the shortfalls in the US-64 and the regular return schemes. Needless to add no ingredient of the UTI package will work but for the open ended commitment given by the Finance Minister.

It is noteworthy also that the package tries to address all the problem ridden schemes of the UTI and not just the US-64.

It attempts to restructure several monthly income schemes as well. The problems in the latter were caused by the promise of a guaranteed return that could not be met on the basis of their performance. For a long time, the malaise in the UTI was mistakenly taken to be synonymous with that of the US-64.

True, the latter's problems were more widely publicised especially after the debacle in July last when the then Chairman of UTI announced a suspension of its operations. Since then the Government has been trying to alleviate the problems of the unit holders but in a piecemeal fashion. The guaranteed repurchase facility that began in December last for old unitholders was a safety net. Up to 5,000 units were to be bought at a minimum price, which began with Rs. 10 going up in instalments to Rs. 12 in May 2003. For those owning more than 5,000 units, there was a commitment to buy them back at a price of Rs. 10 or at the NAV whichever was higher.

Unfortunately the US-64's NAVs, which were made public for the first time late year, have never even remotely approached the par value of Rs. 10. At present it is at around Rs. 6. The Government's financial support can be quantified only by arriving at the difference between the NAV price on a particular date and the commitment given to buyback (at Rs. 12 for individual holdings up to 5,000 and Rs. 10 for the rest). It was feared before the latest package was announced that the US-64 scheme would come to an abrupt end in May 2003. As the Government has extended the repurchase option indefinitely, an imminent collapse of the scheme is unlikely. However, the behaviour of the unitholders cannot be predicted accurately at this stage. A number of other factors such as the state of the stock markets, the impact of the latest measures on the NAV of US-64 and the existence of alternative avenues will matter.

As also the promised tax incentives, which have since been clarified to include exemption from capital gains tax on the units, that will be traded on the stock exchanges.

The government also proposes to exempt the tax on dividend income received by the US-64 and pass it on to the unitholders who will be given tax exemption from this income. There is also a proposal to offer tax free bonds to large unitholders in lieu of cash redemption time.

All support measures emanating from the Government are apt to be criticised. An ideological opposition however has to reckon with the fact that even the U.S. authorities have bailed out several entities all of them from the private sector. The Government's handling of the UTI crisis hardly throws up conclusive proof as to the relative superiority of private sector over public sector. Within the mutual fund category itself many highly touted funds have performed dismally.

Yet, UTI's problems have been recurring and its size is immense. It was also structurally flawed: promising a regular return while deploying a bulk of its corpus in equities. Moreover, despite having expert advice on many occasions (and Government subsidy too) the US-64 could not correct itself.

It may be too early to assess the impact of the package. However, the splitting of the Trust into two cannot be painless.

The fixed costs of UTI, now shared by all the schemes, will now be borne by two different entities and will consequently be higher.

The Government says that a new set of professional managers will be recruited for UTI-II. Eventually there is a talk of privatising it.

Through the package and subsequent clarifications the Government hopes to instil confidence not only among shareholders but the investment community at large.

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