Sucheta Dalal :UTI can either restructure or go for multiple bailouts (6 January 2002)
Sucheta Dalal

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UTI can either restructure or go for multiple bailouts (6 January 2002)  

Earlier this week Unit Trust of India (UTI) achieved the smooth transition of its US-64 scheme to a Net Asset Value (NAV) based system. Unfortunately the clever planning that ensured the transition has only postponed action on its many problems. Instead of a large bailout in January, it has opted for a continuous present bailout in tiny driblets; and has postponed the big problem to May 2003 when all unit holders owning over 5,000 units can redeem them at Rs 10.

What we know is that UTI has the present problem well in hand. It is as follows: The government will continue to pay the difference between NAV and the Rs 10 plus redemption price to those holding 5,000 shares. The Rs 3,000 crore Line of Credit that UTI has organised from banks to meet all immediate redemption demands will help it avoid distress sales which would depress the market. So far so good; but this does not even begin to resolve UTI’s problems. Despite the Malegam Committee and the Tarapore Committee having gone over its operations and investment decisions, the bad news continues to provide unexpected shocks.

Among these is the recent revelation that UTI had been meeting redemption demands through a huge borrowing of Rs 6,500 crore from commercial banks and other schemes in April-May 2001, even as it continued to issue reassuring statements to the effect that there was no problem in UTI. Of this borrowing, a significant Rs 2,500 crore came from a set of commercial banks, many of which had redeemed their units before the book closure and the subsequent problem even as they lent money to UTI. If this smacks of insider trading, then neither Sebi nor the government seems willing to investigate it.

Investor groups such as the Midas Touch Investors Association have written to the Sebi to order an inquiry. They claim that since the US-64 is listed on various bourses, it is well within Sebi’s powers to conduct such an investigation. It must be remembered that while UTI faced huge redemptions, its former chairman P.S. Subramanyam had repeatedly denied the problem.

The insider trading issue however is only a minor part of UTI’s gigantic problems. The biggest of these is its failure to quantify the extent of possible shortfall in all its schemes and to fix potential liability to the exchequer. The Malegam Committee had clearly demanded such an audit. But since the findings of the audit may be politically unpalatable this crucial recommendation has simply been ignored in favour of unquantified open-ended bailouts.

As things stand, nobody knows how much of tax payers money will be gobbled up by the US-64 in May 2003. It would depend on the fund management skill of the present team, its honesty, accountability and the state of the economy and the capital market.

Also, there is a bigger predicament looming ahead in UTI’s 25 assured return schemes. The Malegam Committee has pointed out that 16 out of these schemes with an aggregate unit capital of Rs 17,814 crore mature within the next three years. It further says that there is already a ‘significant gap between the future liability and investible funds in respect of assured return schemes’. The gap ‘will have to be met either by the sponsor or the AMC’, it says.

In UTI’s case this means the exchequer. Highly placed government sources admit that the gap could go up to Rs 10,000 crore. As against this it has a Development Reserve Fund (DRF) from which to meet part of the liability. The DRF stood at Rs 1,535 crore at the end of June 30,2001; but much of it is unlikely to be available to meet any redemption demands. According to informed sources, all of UTI’s real estate ownership has been dumped into the DRF making it illiquid. The real estate accounts for over half the DRF. Sources at Sebi says that UTI’s diverse investments in the bank, bourses such as NSE and OTCEI, the National Share Depository and UTI Securities have also been made out of the DRF. So what has the government done so far to set things right?

First, there is a new chairman at UTI, who has an impeccable reputation but no experience as a fund manager. Secondly, he has already attempted to implement some of the recommendations of the Tarapore Committee and the Malegam Committee. Thirdly, the government has announced a four member advisory board that will supervise the performance of the chairman and its trustees.

However, nobody is quite clear what role this committee will play. Especially since some members say that their names have been announced without so much as seeking their consent. All it seems to do is to provide another set of people with a lot of power and no statutory accountability. Can these steps be considered an adequate restructuring of the investment behemoth and will they be adequate to clean up ‘the mess at UTI’?

It seems safe to say that it is unlikely. Simply tinkering with the present structure does not amount to comprehensive restructuring. What UTI needs more urgently is an amendment to the UTI Act and some urgent decisions. Let us not forget that only three of the 19 recommendations of the Deepak Parekh Committee were not implemented in 1999—but they were good enough to cause a second and far bigger debacle at the Trust.

These were: That UTI should be NAV driven; that there should be a separate Asset Management Company and that the number of Trustees should be increased to five. After the second collapse of July 2001, only one of these recommendations remains relevant. It is, that UTI should have a separate AMC. But this would need an amendment to the UTI Act and some clarity on possible action. Will UTI have one AMC as suggested by Malegam or opt for the Tarapore prescription of three AMCs? It is likely that the government will push through a comprehensive restructuring package only if it is under some pressure to do so. However, what is not immediately clear is where this pressure would come from. Unit holders are only interested in wrangling a bailout from government, while the JPC which is investigating the UTI crisis seems clueless and reluctant. Hopefully it is the fear that UTI’s unending problems will act as a continuous bearish pressure on the capital market that will finally force a clean up.

-- Sucheta Dalal