Sucheta Dalal :Finding a solution to UTI (5 August 2002)
Sucheta Dalal

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Finding a solution to UTI (5 August 2002)  

THE US has just signed the Corporate Reform Act giving almost unlimited powers to a new oversight board in order to investigate accounting firms and public companies. Reacting to this, a top US speculator says: ‘we now have a government solution to a government created problem’. It was after all the US government that first put a cap on tax deductibility of executive pay and then exempted performance-based compensation, and thereby virtually created an atmosphere that encouraged pumping up revenues and earnings numbers. The result: huge accounting scandals.

In India too, it is the government that set the stage for UTI’s double collapse. It put political appointees in charge of its Rs 60,000 crore corpus, permitted it to grow into an unchallenged behemoth through tax breaks, ignored issues such as adequate capitalisation and reserves and allowed politicians, businessmen, brokers and bureaucrats to rape its funds. The difference is, even a year after UTI’s second collapse we are unwilling to even acknowledge the full extent of the liability.

Last week, the government doled out Rs 500 crore to meet redemption demands of the US-64 scheme. Having postponed much of the US-64 liability to a single day on May 31, 2003, government has since refused to quantify potential loss to the exchequer or to find ways to mitigate the damage.

Here is an estimate UTI’s liability. The government paid Rs 300 crore for a bailout in FY 2002, and is expected to pay Rs 1,000 crores in FY 2003 towards redeeming upto 5000 units per investor. On May 31, 2003 it would take a blow of nearly Rs 5,000 crore on a single day. In addition, there is the MIP burden. As of January 31, 2002, contingent liability on account of the assured return schemes was Rs 8,189 crore.

With a liability of nearly Rs 15,000 crore, the government should have been working overtime to repeal the UTI Act and insulate tax-payers from such liabilities forever. But, that can only be done by addressing the legitimate interests of unit holders and not by trying to dump the problem on reluctant ‘sponsors’. A group of ministers comprising Finance Minister Jaswant Singh, Planning Commission deputy chairman KC Pant and Disinvestment Minister Arun Shourie is now expected to work at restructuring Unit Trust of India (UTI).

This group would do well to consider some proposals made by the current UTI management. They are by far the most sensible and workable options in the long term even though it means that taxpayers who stayed clear of UTI will end up paying for UTI investors through the exchequer. The plan is as follows:

n UTI has investible funds of around Rs 50,000 crore. It suggests that State Bank of India, Life Insurance Corporation, General Insurance Corporation and Bank of Baroda, should be requested to become UTI’s sponsors with a stake of 25 per cent each. (Not Bank of India, which is exiting the mutual fund business or IDBI which is in the process of restructuring itself). All four potential sponsors have deep pockets. They also have their own mutual funds whose combined corpus is just over Rs 5,000 crore and none have a foreign tie-up as yet. That makes it ideal to merge all four mutual funds with UTI to form one large organisation with Rs 55,000 crore of investible funds.

n The UTI Act should be repealed to put in place a new structure with a Sponsor, an Asset Management Company and a Trustee Company. Having created such a large institution it is imperative that its management should not remain with these sponsoring government institutions. At that stage, UTI should actively sell at least 50 per cent of the equity to strategic partner—a major US fund like Fidelity or Vanguard. This ambitious proposal will only receive serious consideration if government accepts and addresses the MIP liabilities.

n Further, government has to address the bleeding US-64. It has already has borrowed over Rs 2,000 crore from its other schemes and Rs 3,000 crore from banks to meet redemption pressure. As a result, it is constantly selling its blue chip investments merely to keep afloat. Moreover, on May 31, 2003 when government acts on its promise to redeem units at par, the scheme has no option but to fold up.

Apart from killing this once popular scheme, the US 64 will exert a constant bearish pressure on the capital market by being in continuous liquidation over the next 10 months. Again, UTI has suggested an alternative—that the government give it the Rs 5,000-odd crore today as some sort of recapitalisation bonds with a 10-year tenure and eight per cent coupon. UTI can pledge these with institutions and raise funds to repay its borrowings from banks and other schemes. Having addressed the negative liquidity issue, US 64, which has beaten the index in recent months, stands a better chance of turning in a good performance.

What UTI is pleading for is some sort of Special Purpose Vehicle with a corpus of Rs 7,000-8,000 crore funded by bonds issued by the government. Only then will it be able to stop liquidating its portfolio and selling its best scrips. UTI’s chief M. Damodaran deserves a fighting chance to prove he can turn UTI around.

-- Sucheta Dalal