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Restructuring, key to UTI survival

G. Thimmaiah

THE controversy over insider-trading in the US-64 scheme has not really brought out the UTI's inherent weaknesses of organisational design and functioning. Even if the Finance Minister, Mr Yashwant Sinha, gets to the bottom of the US-64 fiasco, the basic problems facing the UTI will not go away. Unless a major restructuring is done, the UTI will continue to be in the news for the wrong reasons.

The UTI, launched in 1964 through the UTI Act of 1963, was started with the avowed objective of encouraging small investors to participate in the equity market without exposing them to the associated risks. The intention was to channel middle-class house hold savings going into gold and real-estate into more productive investments. Such a policy was expected to give a boost to the stock market, which was not yet developed.

While the intentions were laudable, the way the UTI was designed came into question right from the start. It was created as a public trust without profit motive, and was to collect only a charge towards development reserve fund and a fee for managing the investments. However, the contributions from unit-holders were large enough not only to meet its expenses but also to be saved and invested in subsidiary enterprises such as UTI Bank, UTI Capital Market Research Institute, and so on.

But, more important, the UTI was allowed to accept unlimited corporate investments in its schemes. This was inconsistent with its objective. This enabled many corporate investors indulge in insider-trading -- not a new discovery, therefore. It has been g oing on depending on the pliability of the decision-making functionaries of the UTI.

The UTI, being a public trust, should have been asked to supply periodically information on its investment portfolio to all investors through newspaper advertisements. Major investment decisions were no doubt expected to be taken collectively by the boar d, as was the practice with all financial institutions (FIs). But there was enough room for manipulation. The chairman was allowed more than the required discretion in the UTI's overall management, which undermined the wisdom of collective decision-makin g.

This was allowed because the Finance Ministry began giving oral directives to the UTI to intervene whenever the stock market lost steam, especially after the presentation of the Union Budgets. Such directives inevitably resulted in inappropriate stock se lection, often made at the behest of one individual or the other.

In other words, the UTI faced all the ills of a public sector enterprise under the Licence-permit Raj. As bad habits die hard, the UTI's modus operandi continued even during the liberalisation years, with all the resultant unavoidable consequences.

There is, therefore, no point in trying to search for scapegoats. What is required is a change in the UTI's organisational design and functional responsibilities.

It should be acknowledged that the need for a public trust to encourage flow of household savings into productive assets has disappeared since the emergence of mutual funds floated by pubic sector banks (PSBs). Mutual fund activity is now broad-based wit h both public sector subsidiaries and private sector mutual funds competing in the financial market. They have come to be reasonably regulated by the RBI and do actively participate in the capital market. The UTI was created at a time when only unregulat ed private chit funds existed.

Should the Government, therefore, deliberate on the need to save and continue the UTI? Of course, even if the UTI is liquidated, the Government would have to pay back the face value of the US-64 to the investors and transfer the other schemes to public s ector mutual funds. But this is neither a desirable nor feasible solution.

Alternatively, the UTI could be privatised wholesale. But there may not be many bidders, and the process could drag on, especially with all the ongoing controversies.

To save the trust, therefore, the UTI Act will have to be amended, making it a public sector corporate mutual fund. The Government should put in a token capital of Rs 100 crore, which is not unmanageable despite the current financial straitjacket.

Next, the UTI should, barring the Capital Market Research Institute, delink its subsidiaries. The UTI Bank should be turned into an independent joint venture bank. There should be a limit -- better still, a ban -- on corporate investments in UTI schemes. This, and competition from other mutual funds, would reduce dramatically the investment funds which the UTI can mobilise.

Therefore, the limit must be such that corporate investors will not be able to play havoc again with the UTI's investment decisions. Preferably, corporate investors should not be allowed representation on the UTI board. This may conflict with the princip les of governance, but corporate entities often violate them blatantly. Hence, there need not be second-thoughts on imposing such a restriction.

Further, the Finance Ministry should not interfere with the UTI's functioning, even if it is for saving a stock market collapse. The UTI should be supervised by the RBI and regulated by SEBI. It must be ensured that all commercial decisions are made coll ectively, with the help of professionally qualified finance and portfolio mangers. Managing the UTI's investments should not be left to about-to-retire managers of PSBs.

Thanks to liberalisation and, more important, the globalisation of the financial sector, the country is able to attract both Indian and foreign trained professionals. The Government should tap this talent rather than set store by civil servants. There sh ould also be some minimum criteria with regard to the professional background of those to be appointed in the top slots, including the chairman, who are involved in decision-making.

(The author is a former Member of the Planning Commission.)