The current UTI chairman, Meleveettil Damodaran, will be the administrator of UTI-I and will also head UTI-II. Damodaran’s heading UTI II will have to endorsed by the new sponsors for UTI-II, including State Bank of India, Life Insurance Corporation, Bank of Baroda and Punjab National Bank.

The sponsors of UTI-II have set up a UTI Mutual Fund, a UTI Trustee Company and also a UTI Asset Management Company, as per the provisions of Securities and Exchange Board of India regulations (Sebi), to manage UTI-II.

This new mutual fund will be managing 43 net asset value (NAV)-based schemes of UTI with a combined corpus of Rs 15,000 crore. The sponsors have made a joint contribution of Rs 10 crore to set up the asset management company.

Finance secretary Dr S Narayan said the agreement marks the operationalisation of the UTI (Transfer of Undertaking and Repeal) Act 2002. “All NAV-based schemes of UTI will form part of the new mutual fund.” The US-64 and other assured income schemes will remain with UTI-I, which will be looked after by an administrator.

The government has also notified names of advisors to UTI-I, including
D Swarup, additional secretary (budget); U K Sinha, joint secretary (capital markets); A N Shanbagh, tax expert; and N C Bhide, head of the National School of Banking.

Says Damodaran: “UTI-I will manage assets worth Rs 31,000 crore. The UTI-II has assets worth Rs 15,000 crore. UTI has received Rs 1,200 crore and is not likely to ask for more funds in the current fiscal for meeting redemption pressure. However, much would depend on redemptions in February and March.”

An earnest attempt
All the staff members of UTI have been transferred to UTI-II, Damodaran says. “UTI-I will requisition necessary personnel from UTI-II to manage UTI-I. They will return to UTI-II after winding down UTI-I.”

On the matter of privatisation of UTI-II, Narayan says: “The new sponsors have come in and it would be for them to decide the future course of action.” The agreement signed between the government and the sponsors stipulates that sponsors would be free to sell the rights to manage assets to any third party complying with statutory requirements, including protecting the interest of employees.

According to the agreement, the sale consideration for the transfer and vesting payable by the sponsors to the government will be determined within four months and payable within three years on the basis of a valuation exercise by two sets of consultants and valuers.

The government will also compensate for any liability, loss or damage that might be incurred by the new sponsors of UTI-II during the next three years.

Finance Minister Jaswant Singh, who was present during the signing of the agreement between the government and sponsors, says the government is trying to work out ways to create a secondary market for US-64. “Trading in US-64 will be initiated soon and a secondary market will be created for the instrument.” The ministry has already consulted Sebi on the issue.

The task ahead
The government has also assured investors that US-64 will be bought back by UTI at Rs 12 per unit for the first 5,000 units if they hold on till 31 May 2003. Holdings in excess of this limit would fetch at least Rs 10 per unit. The current value of US-64 is said to be around Rs 6 per unit.

Since the time UTI got into a mess about two years back, the government has paid out in excess of Rs 8,000 crore to bail out UTI. The government may also have to shell out more money in future for the assured return schemes. However, the new package is clearly a part of the process where UTI’s schemes are Sebi-compliant and in tune with dynamics of the markets as it should be.

It is now to be seen whether the small investors, for whom UTI was the be-all and end-all of investing, will stay with UTI or not, in whichever name and shape it may be. In all likelihood, the small investor will wait and watch UTI’s performance before making a decision.

Damodaran, who was appointed by the government after the previous chairman,
P S Subramaniam, was sacked, has done a remarkable job in cleaning up the stables till now. His ability to retain the small investor with UTI, however, will be the acid test for him as well as the country’s largest mutual fund.