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UTI to be bifurcated; US-64 bailout package approved

Tara Shankar Sahay in New Delhi

The Cabinet Committee on Economic Affairs, chaired by Prime Minister Atal Bihari Vajpayee, on Saturday approved a bailout package of over Rs 14,500 crore (Rs 145 billion) for the beleaguered Unit Trust of India to meet liabilities on its flagship US-64 and assured return schemes.

Significantly, the CCEA also decided to bifurcate the UTI and then privatise UTI-II. Briefing reporters following the three-hour-long meeting held at Prime Minister Atal Bihari Vajpayee's Race Course Road residence, Singh pointed out that the CCEA had granted its approval to the reform package.

He said the CCEA had decided to divide the scheme into two parts:

• The old protected UTI (UTI-I), comprising US-64 for which assured repurchase prices have been announced and assured return schemes; and,
• The New UTI (UTI-II) comprising net asset value based schemes.

He said the government would meet its obligations annually to cover any deficit in UTI-I.

The finance minister stated that UTI-I would be managed by a government-appointed administrator and a team of advisors, while UTI-II would be managed by a professional chairman and board of trustees and would be privatized.

He said the UTI Act would be repealed through an ordinance and both UTI-I and UTI-II would be restructured according to SEBI regulations.

The operational aspect including, but not limited to, distribution of assets and liabilities between UTI-I and UTI-II would be worked by the finance ministry.

"It has been decided that all earlier commitments regarding US-64 will be extended beyond May 2003," the finance minister said, adding that the government would honour the redemption guarantee as had been approved by the Cabinet Committee on Economic Reforms at its meeting in December 2001 for US-64 unit holders.

According to Singh, the liability in this account was currently estimated to be about Rs 6,000 crore (Rs 60 billion) which could vary depending upon the market conditions.

Singh said that all commitments related to the Unit Scheme-64 unitholders would be extended beyond May 2003. The finance minister assured that the government would honour the redemption guarantee for US-64.

The government will meet its obligation annually to cover any deficit in UTI-I and it will be managed by government appointed administrator and a team of advisors nominated by the government, he said.

He said that so far as the assured returns schemes were concerned, wherever interest could be reset, it would be reset at a lower level.

He said: "In respect of the assured return schemes, wherever interest can be reset, it will be reset at the lower level." And the current shortfall in these schemes was estimated to be Rs 8,561 crore (Rs 85.61 billion).

Stating that investors' confidence in the UTI had eroded in the recent past, Finance Minister Jaswant Singh said the package was meant to protect the pensioners and other small investors besides running the net asset value-based schemes of the fund on professional lines.

Tax sops mulled

Interestingly, the government will also consider extending some tax concessions to US-64 unitholders so as to create a market, reduce redemption and keep people invested in the scheme.

"The objective will also be to create a market and reduce redemption, and provide an incentive to the unitholders to remain invested in the scheme," the Union finance minister stated.

Later, answering questions pertaining to UTI-II, Singh said "After it has demonstrated its success, we shall then talk about its privatisation."

Singh asserted that there would be no budgetary impact due to the package though it would add to the fiscal burden and contribute to the public debt.

He said no cash transactions would be involved and a sum of Rs 1,000 crore (Rs 10 billion) has already been pumped in for the US-64 and other assured return schemes, while the remaining Rs 5,000 crore (Rs 50 billion) would be arranged.

"We will be alert and as far as UTI-II is concerned, we will run it on professional lines", he said adding that during the transition phase the finance ministry would be managing it.

The future course of UTI-II (on privatisation) would depend on the recommendations of the professionals.

He pointed out that the professional chairman for UTI-II would be requisitioned after advertisements are inserted in newspapers in the country and abroad.

He characterised the UTI reform package as "a major departure from the protected regime and system of the past."

Package for IDBI, IFCI soon too

Singh told reporters after a meeting of Cabinet Committee on Economic Affairs that a package for the Industrial Finance Corporation of India and Industrial Development Bank of India would also be announced soon.

Private investment to be encouraged in water supply

In a bid to encourage private investment in water supply works, the government also decided to exempt machinery for setting up water purification and desalination plants from customs and central excise.

Referring to the current water shortage, Singh said the exemption from central excise duty for pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility would also be provided.

He said on the direct taxes side, there was already a provision in section 801A of the Income Tax Act, 1961 which allows a deduction of 100 per cent of profits of companies engaged in the business of providing infrastructure facility including water supply project.

It was also decided that in addition, plant, machinery and equipment for the purpose would be entitled to a depreciation rate of 100 per cent per annum.

He, however, pointed out that while the scheme would come into effect immediately, concessions would not be available retrospectively.

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