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Sunday, November 04, 2001












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Keeping Govt. and Trust apart


UTI is the largest player in the mutual fund industry with total investible funds of domestic schemes (at market value) as at June 30, 2001 of Rs 56,057 crore, constituting about 57 per cent of the total investible funds of the industry. US-64, with a total unit capital as at June 30, 2001 of Rs 12,786 crore, had a substantial share of these investible funds.

UTI's strengths: UTI has certain unique strengths; notable among them being:

* Its large size with consequential economies of scale;

* Its nation-wide well-entrenched distribution network and, consequently, its wide reach and capacity to mobilise large resources;

* Its brand image arising out of a public perception that the safety of funds is assured by its pseudo Government character, which may not be entirely unjustified.

* The fact that it does not have an AMC to whom management fees would have to be paid, which results in higher returns available to unitholders.

UTI's weaknesses: It also has certain pronounced weaknesses:

* Being the largest player in the mutual fund industry, UTI also has large investments in individual companies. Its ability to turnaround its portfolio quickly is therefore somewhat limited.

* The fact that it combines within itself the roles of an AMC and the trustee results in the absence of a degree of accountability, which an AMC normally owes to the trustee and the control which the latter enforces upon the former.

* There is a lack of transparency, particularly with regard to US-64 where the sale and repurchase price are not linked to the NAV and the NAV is not disclosed to the unitholder.

* The fact that UTI is perceived as having a pseudo Government character is as much its weakness as it is its strength, particularly in respect of US-64. While it enhances its ability to sell the units, it also gives a false sense of comfort which may not be true or even desirable.

* Moreover, in a highly competitive market, public perception of UTI as a pseudo-Government institution may affect its ability to attract and retain the best professional talent or to adequately motivate it.

The ownership question: It is for consideration whether UTI should be wholly-owned and managed by the Government through participation in the sponsoring company. The public perception of a Government umbrella gives a measure of safety, security and implied guarantee to the unitholders. This is largely responsible for UTI's success as a savings institution.

Weight of perception: The perception imposes an implied responsibility on the Government for a possible bail-out of UTI in the event of its failure to meet specific or implied commitments. The Government did this by contributing to the SUS Scheme to the extent of Rs 3,300 crore following the recommendations of the Deepak Parekh Committee.

There is a public perception that the Government will need to do likewise to ensure that UTI will meet its commitments to US-64 unitholders at least to the extent of 3,000 units out of their aggregate holdings.

Participation by the Government in the sponsoring company may strengthen the perception of implied responsibility of the Government for the due fulfillment of obligations by UTI, but this responsibility may be open-ended and the Government may not wish to accept such a responsibility.

De-risking the government: However, non-participation by the Government in the sponsoring company may not by itself remove the perceived link between the Government and UTI so long as the Government continues to exercise powers such as the power to appoint the chairman of the board of trustees under the UTI Act.

At the same time, it is necessary to recognise that if the perceived link with the Government is suddenly removed _ and certainly if it is removed before US-64 becomes NAV-based _ without providing an adequate substitute, public confidence in UTI would be affected and can even lead to a flood of redemptions which could create a crisis both in UTI and in the capital market.

It is therefore necessary that if the Government does not participate in the sponsoring company, the participation of the sponsoring institutions should remain `locked-in' at least for the initial period.

A strategic partner: The responsibility is open-ended and which Government may not wish to accept. An option for consideration is the introduction of a strategic partner. If this partner is an established player in the market who enjoys the confidence of unitholders, the risk of loss of public confidence through the removal of the Government link would be largely mitigated. If such a partner is introduced, the Government should completely withdraw.

Otherwise, the Government may be perceived to be accountable without having any effective control. If on the contrary, it attempts to effectively control the operations, it will get unnecessarily involved in running a commercial operation for which it may not be able to impart the necessary skill and flexibility. A complete withdrawal of the Government would also achieve the objective of de-risking the Government from the operations of UTI.

The UTI Act: If the UTI Act were not to be repealed but merely amended, there is a danger that the Government may be left with residual responsibilities under the Act which would result in a public perception of continued Government accountability.

In such a situation, it may become necessary to give UTI a fully Government character with senior-most positions in UTI being manned by Government officers. Clearly, this is not a preferred outcome but it is mentioned only to emphasise the fact that accountability cannot be divorced from day-to-day management responsibility.

A mere amendment of the Act may still leave in place the feeling of an implicit government guarantee with Government still remaining answerable to Parliament. It is, therefore, desirable that the UTI Act be repealed and replaced by a new enactment which totally distances Government from UTI. In enacting this Act, the approach should be to ensure that transaction costs (stamp duties, taxes) are minimised, if not eliminated, to the extent that the ownership of the assets vests in the AMC at the lowest possible cost.

The assets Of UTI: UTI has total investible domestic funds at market value as at July 31, 2001 of Rs 54,223 crore, of which Rs 24,704 crore is represented by investments in equities and Rs 29,519 crore by investment in other instruments.

The investments in equities include several large blocks of investments in individual companies which may not be possible or desirable to liquidate through open market operations at least in the near term.

It is, therefore, necessary to ensure that control over these large funds and particularly over the large blocks of equity investments in individual companies is not allowed to rest absolutely with any single person or group.

Edited extracts from the Report of the UTI Corporate Repositioning Committee headed Mr Malegam.

Pic.: The UTI Chairman, Mr M. Damodaran... Will the Government delink itself from UTI?


Section  : Opinion
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