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For making good shortfall in assured schemes -- Development fund is guarantor, UTI told

Shaji Vikraman
Hema Ramakrishnan

NEW DELHI, May 9

THE Securities and Exchange Board of India has told the Unit Trust of India that the guarantor for the mutual fund's assured return schemes is the trust's own Development Reserve Fund (DRF).

This implies that the onus for meeting any likely shortfall in assured return schemes like the Monthly Income Plans (MIPs) at the time of redemption would lie squarely with UTI, rather than with its sponsors. The prospectus for the MIPs mention the DRF as the guarantor. SEBI's ruling on this issue has been communicated to the Finance Ministry by UTI, according to senior Government officials.

Although this is the correct legalistic position, UTI and the Government may have to contend with is the situation that could arise when the DRF corpus is inadequate to bridge the deficit in any of the assured return schemes.

Government officials reckon that the issue could be tackled if and when the DRF is fully depleted. In such a scenario, UTI may be forced to knock at the door of the Government again for support.

Last month, prior to the due date for the redemption of MIP 97, the UTI management wrote to the initial contributors to UTI's capital - - IDBI, SBI and LIC to contribute towards the shortfall of close to Rs 400 crore in the scheme.

However, these institutions backed off saying that they were not the sponsors of UTI and therefore were not liable to make good any shortfall. Their stand is that as UTI was set up under a statute, all of them had to contribute to the initial capital. Subsequently, SEBI directed UTI to meet the shortfall in MIP 97 (1) by dipping into its development reserve fund (DRF).

There is a view shared by some in the Government also that these institutions and banks had failed to discharge their fiduciary responsibilities. A reflection of this is the fact that during the two crises faced by UTI in 1998 and in 2001, there was no record of the nominees of any of these banks and institutions having protested against some the dubious investments made by the management of UTI.

The issue of conflict of interest was also raised in the past considering that IDBI, SBI and LIC have promoted their own mutual funds. The issue was not addressed seriously either by the government or these investors at that time.

The Government, in turn, has taken the stand that all these assured return schemes were approved by the regulator after 1997, thereby implying that it had no role in providing any explicit guarantee for such schemes. Technically, the Government's role going by the UTI Act is restricted to appointing the Chairman of the trust and providing policy directions.

There is no mention anywhere in the Act of the Government either guaranteeing the returns of schemes floated by UTI or protecting the interests of unit-holders. This can be used by the Government to mount a defence.

Subsequent to this, the issue was referred to SEBI for a final view. SEBI has now informed UTI that the DRF is the guarantor for all the assured return schemes. The MIPs form the dominant part of UTI's assured returns schemes. According to estimates, UTI is likely to face a shortfall of close to Rs 4,000 crore on other MIPs which are all due for redemption later this year and next year.

Finance Ministry officials pointed out that while several options - including the roping in of new sponsors such as state- owned banks and insurance companies - were deliberated upon at a high-level review meeting on the proposed restructuring of UTI on Wednesday, no final view had been taken.

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