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UTI approaches SEBI to reset returns for assured schemes

Shaji Vikraman

NEW DELHI, Sept. 8

UNIT Trust of India has informed the Government that it has moved the Securities and Exchange Board of India (SEBI) to re-set the returns in several of its Monthly Income Plan (MIP) schemes, in which both the principal and the annual dividends are assured.

According to senior Finance Ministry officials, the Government has also written to the UTI to obtain the views and the approval of the market regulator on the foreclosure of some of the long-term assured return schemes, which are due for redemption only after 10-20 years.

One of the options being looked at is the foreclosure of four of UTI's long-term full assurance schemes. Of the four, SEBI's views on foreclosure need to be taken only for three schemes as one of the schemes was launched as early as in 1986. The long-term assurance schemes have a maturity period ranging from 18-22 years.

The objective of re-setting the assured return rates and foreclosure of some of the MIPs is to reduce the Government's liability arising out of the shortfall in the assured return schemes (ARS). The estimated liability in MIPs is close Rs 8,561 crore, a substantial chunk of which pertains to the four long-term fully assured schemes.

The longer that most of these assured return schemes are kept in operation, the higher will be the bailout tab for the Government. This is because some of these MIPs, especially those launched in 1997, offer a return of 14 per cent whereas the earnings on these schemes work out to only over eight per cent on an average.

In the current scenario, there is no way the UTI can hope to bridge the shortfall. Therefore, over a period of time, the gap between the net asset value and the unit capital is only expected to widen. So the logical solution would be to foreclose these schemes.

Of the 22 MIP schemes, there are five schemes where only the principal is assured at maturity and the assured returns are to be reset annually.

"UTI has now been asked to explore whether it is possible to reset the dividend at lower rates in the other fully assured MIP schemes where both principal and dividend are assured," said a senior Finance Ministry official.

The ARS along with the US-64 will be hived off to UTI-I, which will be managed by a Government-appointed administrator and team of officially nominated advisors. UTI-II, on the other hand, will comprise all the NAV-based schemes including US-64 units issued after January 1, 2002.

The market value of assets of all UTI-run schemes aggregates Rs 42,000 crore as on June 30 - Rs 17,784 crore for the NAV-based schemes and about Rs 8,000 crore for the US-64 and Rs 17,000 crore for the assured return schemes.

In June this year, the Finance Ministry provided a guarantee of Rs 1,000 crore to honour the commitments to investors in MIP schemes maturing in June and August this year. An additional guarantee may be in the pipeline to bridge the shortfall in the MIP (4) due for redemption in October.

The guarantees are against the assets and cash inflows to UTI's Development Reserve Fund (DRF) and enable the trust to borrow from banks at fine rates to meet its repayment obligations under the schemes. It was subject to the condition that the mutual fund will sell off some of the assets in the DRF within six months.

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