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Shaji Vikraman

According to senior officials, talks will have to be initiated with the institutions also on the extent of their contributions to the shortfall in the assured return schemes of UTI.

NEW DELHI, June 9

THE Government is planning to initiate talks soon with the contributors to the initial capital of Unit Trust of India (UTI) led by Industrial Development Bank of India on their participation in the proposed new sponsoring company for the trust, and also on their share of contribution to the shortfall in all the assured return schemes.

With an in-principle decision on the repeal of the UTI Act having been taken, the Government has to finalise the process for putting in place the SEBI-mandated three-tier mechanism for mutual funds.

SEBI's mutual fund regulations stipulate that a sponsoring company, a board of trustees and an asset management company (AMC) have to be set up for launching a mutual fund. Once the UTI Act is repealed, this structure has to be in place.

The Finance Ministry reckons that the most pragmatic way of doing this is to ensure the involvement of the contributors to the initial capital of the UTI. This includes IDBI, Life Insurance Corporation of India (LIC), State Bank of India (SBI) and Syndicate Bank. The minimum capitalisation requirements of the sponsoring company will not be substantial, with the SEBI regulations putting the figure at Rs 5 crore.

According to senior officials, talks will also have to be initiated with these institutions on the extent of their contributions to the shortfalls in the assured return schemes of UTI such as the Monthly Income Plans (MIPs). Although these contributors have taken the stand that they are not liable to bridge the shortfall as they are not the sponsors of UTI, the view within the Government is different.

"All these assured return schemes were approved by the representatives of these institutions on the UTI board and they cannot escape from their fiduciary responsibilities," an official said.

Two assured return schemes floated by UTI in 1997 are due for redemption by the end of the month. Considering the shortfall of over Rs 1,000 crore in these two schemes alone and the prospects for the other assured return schemes, the Government would pitch in with support along with the other contributors.

This could be in the form of either a guarantee to help the trust borrow from banks and institutions or issuance of special securities on the lines of those issued to banks earlier, officials said. Either way, it will figure as a contingent liability for the Government on its books.

Once these contributors to the initial capital of Rs 5 crore of UTI participate in the proposed new sponsoring company, they will be liable as sponsors for the assured return schemes. That was why commercial negotiations would have to be called for with these institutions and banks, officials said.

The board of directors of these institutions and banks will also have to approve their participation in the proposed sponsoring company.

A view within the Government is that they could be allowed to utilise the investor database of UTI for cross-selling their products as a sop.

The dominant view within the Finance Ministry and among the members of the Informal Group on the Financial Sector constituted by the Finance Minister is that the UTI Act should be repealed. Carrying out amendments to the Act will mean the residual responsibility falling on the Government again in the event of another crisis in the UTI as two expert committees have pointed out.

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