Sucheta Dalal :Killing US-64 and the assured return schemes (4 November 2002)
Sucheta Dalal

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Killing US-64 and the assured return schemes (4 November 2002)  

There was nobody to shed any tears when the Cabinet finally decided to split India’s largest mutual fund company and kill one half of its schemes. UTI has not only betrayed people’s trust, but will also gobble up a whopping Rs 18,950 crore of taxpayers’ money over five years. In a written response to our query, finance secretary S. Narayan said ‘UTI-I will not engage in any new schemes, and therefore, as and when the existing schemes mature, UTI-I will gradually wind down.’

Unfortunately, this plan will not eliminate the overhang of UTI’s constant selling of stock in the secondary market. Wind-down time is June 2003 for the US 64; that is when the government has promised to redeem the units at Rs 10. Since the government will pay only the shortfall between the Net Asset Value (NAV) and the redemption price, the balance will have to be realised by liquidating US-64. According to Narayan, the government’s promise will cost it Rs 6,000 crore. US-64’s corpus is already down to Rs 10,733 crore (from Rs 12,986 crore in March 2002) and according to its website ‘a gross investment of Rs 4710 crore in US 64 has been funded by borrowing’. This will presumably be repaid first in order to avoid interest costs.

The alternative would have to give UTI the money upfront and allow chairman M. Damodaran to “manage” UTI-I according to Sebi rules by creating an Asset Management Company (AMC) and finding a sponsor. However, the government fears that UTI will run up further losses or does not believe that politicians and bureaucrats will stop making demands on it. Not all of UTI-I’s equity investments are listed. Those that were made out of the Development Reserve Fund include UTI Bank, Infrastructure Leasing and Financial Services (IL&FS), National Stock Exchange (NSE), National Share Depository (NSDL), CRISIL, OTC Exchange of India, UTI Investor Services, UTI Securities Exchange and UTI investment Advisory Services.

Of these, UTI Bank is clearly the most valuable asset and has several suitors. Prominent among these is HDFC Bank. In the context of UTI-II, Narayan tells us that ‘the privatisation of UTI-II would be on a pattern similar to the privatisation of PSUs’. Hopefully this will also apply to UTI’s most saleable investment: UTI Bank. However, it is not going to be as easy to flog UTI’s other investments. Its investment in NSE and NSDL apparently command investor interest. However UTI’s attempt to get LIC to buy out its substantial holding (33 per cent) in IL&FS has been turned down. Similarly, investments in OTCEI, Stock Holding Corporation of India, UTI Securities and UTI Capital markets may not find too many takers.

Will the size of bailout then have to be increased? UTI chairman Damodaran says that it would depend on the realisation from these investments. The fate of UTI-II is also not so clear. The finance ministry has announced that LIC, SBI, Punjab National Bank and Bank of Baroda would have an equal stake in UTI-II. But it is not clear if this will make it compliant with the rules of the Sebi, which require at least one of the four promoters to hold 40 per cent of the equity and act as sponsor. Or whether the new owners would merge their own mutual funds with UTI-I in order to avoid a conflict of interest Narayan said, ‘this would be for the new sponsors to decide’.

There is also the issue of UTI’s staff. Its offices, residential premises, staff and infrastructure are geared to handle a corpus of over Rs 75,000 crore. However, since the 1998 debacle, funds under management have dwindled to just over Rs 40,000 crore. After the split, UTI-II will manage just a little over Rs 18,500 crore of funds and will not need the extensive infrastructure. Narayan says that UTI-I will draw staff from UTI-II for its operations. He ignored a specific query on the need to implement a voluntary retirement programme. However, informed sources believe that UTI will have no option but to implement a VRS and this could it cost anywhere between Rs 100 to 200 crores. Since the money cannot come out of the schemes that form part of UTI-II, the cost will either have to be borne by government or it will have to arm-twist the new owners to bear this burden too.

In answer to another query, Narayan says that government hopes to get some money out of the strategic sale of UTI-II. But it would do well to remember that UTI-II will comprise a disgruntled set of unit holders who not only feel betrayed by UTI, but have no reason to believe that their money will be managed any better by the new owners who are another set of government owned institutions. The most disheartening aspect of the UTI bailout is that even while the government is getting set to dole out a massive Rs 14,500 crore for another bailout, it has made no attempt whatsoever to punish those who destroyed UTI (UTI’s former chairmen, fund managers and the politicians who appointed them and directed their decisions). Except for the single case against the investment in Cyberspace Infosys, none of the government agencies including the CBI has pursued any of its scandalous investment decisions ever since former chairman P Subramanyam’s lawyer, Satish Maneshinde, threatened to expose politicians who dictated his client’s actions.

-- Sucheta Dalal