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07 September 2002

Mumbai: After tinkering for several years, the Indian government has finally bitten the bullet. Last week, it announced a landmark restructuring package, along with a Rs 14,561-crore bailout plan, for the country's oldest and largest mutual fund - Unit Trust of India (UTI) - that is sailing through troubled waters.

Unlike the earlier two bailouts, in which UTI was given financial support to meet its commitments, this time round the government has decided to address the core issue. It has decided to amend the UTI Act and split the institution, which manages over Rs 47,000 crore, into two - UTI-I and UTI-II.

Under the recast package approved by the Cabinet Committee on Economic Affairs, US-64, the mutual fund's troubled flagship scheme, and monthly income schemes with assured returns will be transferred to UTI-I. UTI-II will comprise all net asset value-based schemes of UTI.

UTI-II, with an asset-base of over Rs 18,000 crore, will be brought under a professional management, and privatised in time, along with the UTI brand name. UTI-I, with an asset-base of Rs 24,196 crore, will be managed by an administrator.

The government is now committed to meet all liabilities arising out of UTI-I by extending funds to meet any shortfalls arising out of the assured returns promised by UTI to investors. Of the Rs 14,561 crore, Rs 8,561 crore is to meet the liabilities of UTI's assured returns schemes. And Rs 6,000 crore is due to US-64.

The government has also decided to extend the deadline for redeeming the US-64 units at the guaranteed prices beyond May 2003 in perpetuity. The guarantee is that a single entity's holdings up to 5,000 units can be redeemed at Rs 12 in May 2003 and holdings above 5,000 units can be redeemed at Rs 10, provided the investors stayed invested till May 2003.

The deadline has been specifically extended since the earlier cabinet approval provided for the assured return window of US-64 being open only for a month, starting 1 May 2003. This deadline is now being extended indefinitely, permitting investors to encash these units at the already-promised rate, at any time of their choice.

As a result, the redemption pressure on UTI in the month of May 2003 - estimated at over Rs 5,100 crore - will go down, even while permitting investors to finalise their exit plan, balancing the tax incentive for remaining with the scheme against their risk perception and fund requirements.

The government is expected to issue an ordinance to put this package into effect. Though the restructuring package came as a surprise to many, it was expected that one of the briefs to Jaswant Singh, while assuming charge as the finance minister, was to help UTI meet its commitments to investors who are mainly from the middle class, a major vote bank of the Bharatiya Janata Party.

Presently, hot debates are doing the rounds questioning the government's effort to make such huge commitments of close to Rs 15,000 crore to save UTI. But the fact is that the rot in UTI had started quite some time back, thanks largely due to the top brass' political interference and mismanagement over the years.

UTI, with its dominance in the Indian equity market with its massive size, was always seen as a saviour when the markets were in trouble. Many a time, the government had forced the institution to prop up the market by making huge purchases even when it did not made much economic sense to buy stocks at those levels.

These investments were not done in the interest of investors who had put in their hard-earned money in numerous UTI schemes. The sad aspect to this sordid drama is that even when the mutual fund ran into trouble in 1998 the government failed to address the real issue. It did not make any move to scrap the UTI Act and bring the fund under Securities and Exchange Board of India (Sebi) regulations.

If these issues were given due importance at that time, the present fiasco could not have happened. Now, it took a bigger crisis to make the government act, slapping a Rs 15,000-crore liability on, who else, the taxpayers. But the government will encounter a tougher task ahead while trying to get the Bill for restructuring passed in the Indian Parliament and while taking the opposition parties into confidence on the matter.

Well, the government should learn some lessons from this crisis and should understand that half-baked efforts will not work while dealing with other troubled government-owned financial institutions like Industrial Development Bank of India and Industrial Finance Corporation of India.

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