Better late than never – the Government has woken up at last and instead of sweeping it under carpet, it has taken a bold decision to clean up the mess in the country’s largest mutual fund Unit Trust of India on which nearly 24 million investors mainly small and retired persons depended for their monthly income by putting in their hard earned savings.

After sleeping over Deepak Parikh committee report for four years, The Government announced recently the reform cum bailout package for the beleagured UTI by announcing a Rs.14,561 crore bailout for the flagship US-64 and Assured return schemes , an ordinance to repeal UTI Act and splitting the mutual fund into two – sick and healthy before beginning the privatization process.

The announcement made by Finance Minister Mr. Jaswant Singh after getting the approval of the Cabinet Committee on Economic Affairs on August 31 envisages splitting UTI into UTI-I and UTI-II.  UTI-I would cover the US-64 and monthly income plan schemes, while the net asset value based schemes will be hived off to UTI-II which would also include the units of US-64 issued after January one, 2002 when the scheme became NAV based.  The UTI has an asset value of Rs.42, 000 crore as on June 30, of which Rs.17, 784 crore is on account of net asset value based schemes, which would be transferred to UTI-II.  The remaining Rs.25, 000 crore on account of US-64 and 21 assured return schemes would be with UTI-I which would ultimately be wounded up after all the investors redeem their units in non NAV based US-64 and other assured return schemes.  The bailout is to meet the liabilities arising out of the difference in Net Asset Value (NAV) and assured return in units promised by the Government in December after US-64 was frozen due to redemption pressure.

The bifurcation would be done through an ordinance to repeal UTI act.  The Government in December 2001 had promised that unit holders of US-64 would get administered repurchases price of Rs.12 per unit upto Rs.5000 units and Rs.10 per unit beyond 500 units. To ensure that the redemption pressure was mitigated to an extent in May next, the government also announced tax concessions like exemption from dividend and capital gains tax for unit holders to make them retain the units beyond May 2003.  Also it proposed to come out with tax-free certificate carrying 6-7 per cent annual interest to make institutional investors to stay for some more time after May 2003.

On the assured return scheme like monthly income plan, the liability is Rs.8, 561 crore and the bailout would be required over six years.  The government also proposed to reset downwards interest on assured return schemes and subsequently resort to foreclosure of the scheme.

Though the package gives some respite to the 24 million investors of UTI, none can deny the fact there was an uphill task ahead in resolving the self-made crisis.  According to Parikh himself, who submitted his panel report as early as 1998, the Government could have saved several thousand crores, if only it had acted upon its recommendations earlier. 

The new package is certainly a deviation from the past as the then Finance Minister Mr. Yashwant Sinha believed in hands off approach.  The Government has certainly done a rethink on the issue.  What are significant is that the Government has understood the gravity of the situation and that the cleaning up of the financial sector had to be tackled urgently.  No doubt the cleaning up is being done using the taxpayers money but the crisis in financial sector if not tackled could have very serious ramifications as was the case in South East Asian countries during the currency meltdown in 1997.

There are 34 mutual funds operating in India with assets worth over Rs. one lakh crore.  UTI has 43 per cent of the share while other public sector mutual funds like SBI and LIC have eight per cent share.  The private sector mutual funds, which came into being since the liberalization of the economy, have captured 49 per cent of the market resulting in UTI’s market share going down gradually.  Despite these developments UTI did not see the writing on the wall and was very slow to responding to emerging situation.  The volatile stock market added to its difficulties.

The question now is whether UTI should offload its holdings in blue chip companies like Reliance Industries on which it has 6.77 per cent share.  ITC 12.02 per cent, BSES 8.35 per cent, HPCL 10.22 per cent, BPCL 6.22 per cent and SAIL 6.65 per cent.  There is a moot question if these blue-chip shares should be sold or not to reduce the liability on assured return schemes.  Government has categorically said asset bleeding of UTI would not be allowed.  When Government has divided UTI into two – a sick box and a healthy one, why not sell the blue-chip so as to reduce the liability and that would spend that much less of tax payers money in bailing out the beleagured mutual fund.

One failed to understand as to why UTI should hold on to the blue-chip stocks when US-64 is certain not to survive in the present avatar as Government has already frozen non NAV based US-64 which has a total capital size of Rs.12, 447 crore.  Wrong advise and lack of professionalism in dealing with the affairs of the UTI has led to the present state of affairs and it is surprising that what government means by asset bleeding will not be allowed when it has already happened in the past.

As part of the package Mr. Jaswant Singh has said that UTI-II will be headed by a professional who will be paid market salary for such a job before steps are taken to start the privatization process.  UTI-II will no doubt be headed by an administrator till it exists, as Government will continue to have a stake because of the bailout it was giving.  But it does not mean that it should not adopt professional approach in dealing with its assets to minimize the damage.

UTI Chairman Mr. M. Damodaran claims that despite all the commotion about the mutual fund in the last one-year, the ordinary investors are still the mainstay of the trust.  He claims that though the numbers of investors have fallen, 79.15 per cent of the total investor base was still with UTI.  This may be true but if UTI has lost its credibility rapidly, it was because questionable investments of its US-64 funds in over 1000 companies, some of them like Cyber Interference. Most of these investments have been become duds.  None can deny the fact that some of these investments were made allegedly due to political inference.
Political interference and lack of professionalism has created problems for not only UTI but also several financial institutions and public sector banks besides scores of public sector undertakings.  One is happy Government has woken up and started taking some bold decisions though delayed in cleaning up the mess in the financial sector but only hopes at least now onwards it takes professional approach to restore the health of the financial sector without which economy cannot move on to high growth path.