Sucheta Dalal :Saving The Unit Trust Of India (17 February 2003)
Sucheta Dalal

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Saving The Unit Trust Of India (17 February 2003)  

February 1, 2003 marked the birth of UTI Mutual Fund with 47 schemes and a modest corpus of Rs 15,000 crore, which is just a fifth the size of Unit Trust of India (UTI) at its peak.

UTI Mutual Fund is now Sebi (Securities and Exchange Board of India) compliant, but is by no means out of government control. The sponsors to its Asset Management Company (AMC) are four public sector entities — Life Insurance Corporation, Bank of Baroda, State Bank of India and Punjab National Bank —each holding 25 per cent of the AMC’s equity. The mutual fund will be truly out of government’s clutches only when it divests 40 per cent of the equity in favour of a strategic investor. But that part of the plan seems to have gone on to the back burner.

Instead, there are reports that the newborn UTI Mutual Fund, was planning to bid for the AMC of Zurich Mutual Fund, which is up for sale. The Zurich group of Switzerland, wants to get out of India after recording losses of nearly $ 2 billion in its financial operations overseas.

Zurich Mutual Fund had around Rs 4,000 crore of financial assets under management at the end of 2002, and its acquisition increase UTI Mutual Fund’s corpus by 25 per cent to nearly Rs 20,000 crore.

Top UTI sources confirmed that they were interested in the acquisition, but said that a lot would depend on whether the sponsors would be willing to invest Rs 200 crore plus for a successful bid. Lets look at it from UTI Mutual Fund’s perspective. It has a new management in place, and under M Damodaran’s confident leadership, has considerably alleviated investors’ fears about the fate of their savings. In fact, 22 out of 23 of its schemes have outperformed their respective benchmark indices and it still has the largest retail distribution network and the biggest research department in the business. Moreover, after a thorough clean up of its operations and reporting systems, it feels ready for a fresh start. The biggest factor in these rapid changes is chairman Damodaran.

To start with, Mr Damodaran was asked to head UTI, despite his known integrity and no-nonsense attitude (a handicap these days), only because it faced its worst crisis and the government needed to restore investor confidence urgently. In his short stint at UTI, Mr Damodaran has not only lived up to expectations, but also managed to keep UTI away from political interference. In other words, UTI Mutual Fund is all ready to break from the past and move forward, but it is not enough that its 47 schemes outperform the competition — they need to exude enough confidence to attract fresh investment. And that is exactly what Mr Damodaran did by sending out the signal that it is a serious player in the business and is looking for growth through acquisition.

But lets rewind a little and look at where UTI Mutual Fund comes from. When the 39-year-old Unit Trust of India Act was repealed, a gigantic and badly battered institution was split into two. Its corpus had shrunk from a peak of Rs 72,000 crore to just over Rs 45,000 crore. It has already swallowed Rs 4,300 crore of taxpayers’ money by way of bailouts since 1998 and the government had committed a massive Rs 14,500 crore for another bailout scheduled for the end of May this year. (Of course, government has already thrown in a sweetener to restrict its financial outgo by treating US-64 units as five-year, fixed coupon, tradeable, tax-free bonds with effect from June 1, 2003. This is bound to stem the mad rush to redeem units on May 31).

But there was also an unstated commitment that this would be the last bailout for UTI. It was made clear that government would take steps to permanently end its liability for UTI’s losses and get it out of the clutches of powerful netas and babus.

While that promise has not been broken, there is no real hurry to fulfil it either. Firstly, UTI-II or UTI Mutual Fund may seem a confident new entity, but lets not forget that its AMC is still owned by four government entities –– Punjab National Bank, Life Insurance Corporation, State Bank of India and Bank of Baroda. This means that there is some churning in its patrons and the extent of their responsibilities, but no significant difference in the quality of control.

As for UTI-I, nothing has been done to wind up the entity or sell its many assets and holdings. UTI-I comprises the beleaguered US-64 and 22 other assured return schemes with a total corpus of Rs 30,000 crore. It is also stuck with the investments made in its hybrid avatar as a development financial institution. For instance, it owns a significant stake in UTI Bank, which promises to fetch a good price; it has investments in profitable entities such as the National Stock Exchange (NSE) and the National Share Depository (NSDL) and not so saleable investments in Infrastructure Leasing & Financial Services (IL&FS), UTI Capital Markets etc.

Unless UTI-I is wound up, its equity investments sold and a 40 per cent stake in UTI-II’s AMC sold to a strategic investor, government remains firmly in control of the divided UTI.

And there lies the catch.

Even in its truncated form, UTI Mutual Fund is a large entity with considerably market clout. Its funds under management are several times those of its sponsors Mutual Funds.

Chairman Damodaran has already proposed that the sponsors should merge their Funds with UTI, in order to avoid any future conflict of interest. While two sponsors are agreeable, the other two are unsure. If UTI Mutual Fund begins to grow rapidly through mergers and acquisitions, it will soon regain its status as India’s largest mutual fund company. That may be considered a significant achievement while Mr Damodaran remains its chairman, but one can be reasonably sure that once he has achieved a turnaround the same treacherous lobby of politicians, corporates and brokers will turn active again and have him replaced with a more pliable chairman. Were that to happen, UTI would have lost a historic opportunity to escape from the government’s clutches and become an independent entity.

So, while Mr Damodaran is certainly doing a good job at UTI, he will do a bigger service to the nation if he finds a strategic partner for UTI Mutual Fund and sells 40 per cent of the AMC rather than acquire Zurich Mutual Fund.

-- Sucheta Dalal