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The Rediff Business Special/ Nikhil Faleiro

Blueprint for restoring lost glory to UTI

The UTI saga: Genesis of a controversy

When the Pandora's box was opened, the mess inside the box amazed everyone to such an extent that very few people expected the mess to clean up. But the onerous task was left to none other than Deepak Parikh, chairman, HDFC. After labouring for over six months, the committee finally submitted its report which contained a lot of recommendations.

The committee recommended a two-pronged strategy to restore UTI to its former glory:

• Increase the attractiveness of US-64, thereby improving the inflows.
• Restructure the scheme by hiking the debt component.

The committee recommended that the original promoters -- IDBI with its stake of 50 per cent, SBI with its stake of 15 per cent, LIC with its stake of 15 per cent and others -- immediately strengthen UTI's unit capital base by injecting fresh funds and raising it from a paltry original contribution of Rs 50 million to Rs 5 billion. The fresh funds should come on a proportionate basis linked to their holding pattern in the institution, it said.

The second recommendation looked at the revised asset allocation under US-64. Says Deepak Parikh: ``Basically, what we have recommended is the transfer of the portfolio of PSU, FI and bank scrips from US-64 at book value, because we have observed that as on November 30, 1998 the book value of such scrips aggregated Rs 48.10 billion whereas the market value was Rs 28 billion. So we tried to restore some balance or value to the scheme US-64.''

According to the committee, the mechanism proposed is that Special Unit Scheme 99 is to issue special units to the government of India, which in turn will provide dated securities to the equivalent value (Rs 48.10 billion). The dated securities will get exchanged for the PSU, FI and bank scrips in the US-64 portfolio. As P S Subramanyam, chairman of UTI, says: ``The details of the modalities are being worked out from US-64 to SUS 99 and the consequent transfer of GOI securities to US-64.''

As the report states -- the net asset value of US-64 automatically improves by the difference between the book value and the market value of the transferred portfolio. It further states that the government will thus be able to provide support without any impact on the Budget. And apart from the juggling of the finance, the other significant reference by the committee is that eventually US-64 will also be an NAV-linked scheme and come under the jurisdiction of the Sebi.

As Subramanym says: ``We have asked for a time-frame of three years within which the committee expects the NAV to be declared. This will be closer to the pricing policy of units under US-64. And depending on the market conditions it is expected to be achieved earlier than the suggested time-frame.''

What UTI is hopeful about is the turnaround of the economy. As Basudeb Sen, executive director, UTI, says: ``The economy is slowly turning around and with the process beginning, stocks from housing, cement and other infrastructure industries are also looking up, so US-64 portfolio is looking good.''

While all marketmen have welcomed the move, D R Mehta, Sebi chairman says, ``The time for US-64 to become a market-driven one is welcome one and if UTI does it immediately, over 40 per cent of its investors will lose their wealth. I expect them to come out with their NAV by the end of this year which will automatically make it come under the purview of Sebi.''

Agrees Manish Shah, vice-president, Gold Crest Securities. ``The gap between the current NAV which is assumed to be on par of US-64 and the sale/repurchase price is roughly 40 per cent. So there is some kind of subsidy UTI is giving when it repurchases at around Rs 14. This is at the cost of the existing investors who are continuing with the scheme. To offset the subsidy, UTI has to sell at more than the repurchase price and in this way pass the burden to the new unit-holders. Now on account of the tax-free dividend, it expects the inflows to beat the outflows. This is crucial and has to be balanced out.''

The committee had also recommended abolition of dividend tax in respect of dividend or income distributed by UTI and other mutual funds. It also said that the dividend from US-64 be rendered tax free in the hands of the investors, even if the equity investment constitutes less than 50 per cent of the total long-term investments for the next three years.

Given the Deepak Parikh road map, the scheme will be out of its problems in three years. Ajay Srinivasan, managing director, Prudential-ICICI Asset Management Fund, says: ``With the finance minister removing the tax on dividend from mutual funds, this industry will slowly bloom once again.''

And regarding US-64's pricing and dividend distribution policy, the committee believes that sooner or later it will become a NAV-driven scheme. So the spread between the sale and the repurchase prices of US-64 will gradually be increased to deter short-term investors and thus change the investor profile over a period of time which will in the long-term impart greater stability to the corpus.

On the dividend distribution front, the committee is of the opinion that US-64 must follow a more conservative approach to building up sufficient reserves during periods of good performance. Similarly, the yield structure that provides for the rate of return to the investors, needs to be reviewed on a periodic basis.

As a long-term measure, the committee believes that UTI should create a separate board for US-64 with an independent board of directors, with at least 50 per cent comprising independent directors. This calls for an amendment to the UTI Act and pending the amendment, the report suggested the reconstitution of the present asset management committee by including independent experts.

For the revival of the capital market, the committee suggested that the trust promote new schemes for investment in the equity of market-favourite stocks that include ones from the information technology, software, FMCG and pharma sectors.

To see that the new scheme is adequately subscribed to, commercial banks should be encouraged to contribute Rs 10 billion to Rs 15 billion towards the corpus. As Subramanyam says, ``Being equity-related, such a scheme would qualify for the tax benefit and if structured as a five-year, close-ended scheme, it will surely assist in reviving the capital market.''

The committee has not missed the qualitative factors and on this front, the committee has proposed that the Act be amended to increase the size of the board of trustees from 11 to 16 members, the additional five coming from outside UTI.

Says Sen: ``The increase through independent trustees will help achieve greater autonomy so that the decisions are motivated by market fundamentals.'' And with a view to encouraging trustees to assume greater responsibility, the committee has touched on remuneration, proposing that they be compensated at a reasonable level comparable to their overseas counterparts. It said the attendance record of each trustee be published in the trust's annual report which must be kept open to the investing public.

Industry stalwarts however feel that the Deepak Parikh Committee Report is nothing new but only endorses the notes sent by the UTI's board to the finance ministry umpteen times. As Ramesh Shah, a BSE broker, says, ``There's nothing new, it's old wine in a new bottle.''

Part III: After months in a semi-coma, UTI staggers to its feet

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