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‘To meet investors diverse income and liquidity needs by creation of

appropriate Schemes; to act as his one-window investment institution; to

offer best possible returns on his investment, and render him prompt

and efficient service, beyond normal customer expectations. To keep the

common man into sharper focus; to encourage saving and investment

habits among them; to bring to the common man the prosperity of the
capital market at minimum risk, through the habit of investing in Units.

To pursue excellence in performance in all areas relating to sale of Units

investment of funds and service to investors; to having abiding concern

and utmost care for the saving of investors. To develop in each and every
member of UTI the highest degree of self-esteem and pride that we are

fortunate to be in this Institution to offer our best services to investors.’


UTI was set up under the UTI Act, 1963. It commenced its operations
from its July 1964. It was created to spread investment consciousness to

mobilize the savings of the Public, particularly small investors including

those in the rural sector, and to invest these savings in shares and

securities and other financial instruments harnessing household savings

for industrial development of the country and to provide fair returns to

the investors. UTI has grown into India’s largest institutional investor in
the corporate sector.


As a pure Trust without a capital (ownership capital), UTI represents a

unique organizational innovation. Under the provisions of the first UTI

Scheme (Unit Scheme 1964) which was outlined in the Act itself, certain
institutions were required to contribute to the Scheme’s initial capital,

which is redeemable at the discretion of the Trust at such values as may

be decided by the Government of India. Accordingly, initial capital of Rs.

5 Crore for US ’64 Scheme was contributed by the RBI (later on

transferred to IDBI), LIC SBI and Its subsidiaries and other Scheduled

Banks including few foreign Banks. Under the Act the initial capital
contributors to the US ’64 Scheme had been provided representation on

the Board of the Trustees of UTI. Chairman of the Board is appointed by

Government of India. Nominations to the Board are made by RBI (1

Trustee), IDBI (4 Trustees), LIC (1 Trustee) and SBI (1 Trustee). Other

contributing institutions elect 2 Trustees. Executive Trustee is appointed

by IDBI. Board of Trustees does not include any employee. Thus, the
Board consists mainly of representative /nominees of the investors to the

initial unit capital of the 45’64 scheme.

Since UTI does not have any share capital it operates on the principle of

“no profit no loss” as all income and gains net of all costs and
development charges ultimately go back to the initial capital contributors

and unit - holders of respective schemes. At present 45’64 scheme has

Rs. 22000 crore capital while its initial capital was Rs. 5 crore.


In 1964-65, UTI mobilized Rs. 19 crore under US’64 Scheme. The Trust

introduced Reinvestment Plan under US’64 in 1966-67 (Automatic

reinvestment of dividends to US ’64 unit-holders and in 1971, Unit

Linked Insurance Plan (ULIP) which provided not only growth in the
value of investment for the contractual period of 10 years (15-year option

was introduced later) but also insurance benefit. By June 1980, with 4
offices UTI had been operating 6 different Schemes and Plans with an

outstanding Unit Capital of Rs. 391 crores (10 lakh unit-holding

accounts) and invisible funds of Rs. 467 crore. Dividend rate under

US’64 increased from 6.1% in 1964-65 to 10% in 1979-80 (from 7% to

8.5% under ULIP). By July 1, 1980 the sales and repurchases price f

units under US’64 Scheme had increased to Rs. 13.20 and Rs. 11.05


During the eighties, UTI had introduced more than 20 new open-end and

closed-end schemes. These include Unit Scheme for Charitable and

Religious Trusts and Registered societies 1981 (open – end), Capital

Gains Unit Scheme 1983 (open-end), Children’ Gift Growth Fund 1986
(Open-end), Parents Girt Growth Fund 1987 (open-end), Income Unit

Scheme 1982 (closed end), 14 Monthly Income Unit Schemes (from

1983), the first Mutual Fund type Unit Scheme popularly known as

Master share (1986) as also 2 Offshore Funds (India Fund Unit Scheme
1986 and India Growth Fund 1988). By June 1990, the outstanding Unit

Capital increased to Rs. 13,392 crores (65 lakh unit-holding accounts

under 30 Schemes), while the investible funds rose to Rs. 17,651 crores.

US ’64 alone accounted for unit capital of Rs. 7025 crores and investible
funds of Rs. 10,354 crores. The sales and repurchase prices of units

under US’64 had risen to Rs. 13.75 and Rs. 13.00 respectively. The rate
of dividend under US’64 rose to 18% in 1989-90.


The nineties continued to witness high rates of growth in Unit’s

operations. Outstanding Unit Capital increased from Rs. 13,392 crore in

July 1990 to Rs. 16,409 crores in July 1991 and further to an estimated

Rs. 39,303 crores by June 1994. During the same period outstanding
unit-holding accounts increased from 65 lakhs to 103 lakhs and further

to 364 lakhs. Individual investor came into sharper focus during this
period. Investible funds increased from Rs. 17,651 crore to Rs. 21,376

crores and crossed Rs. 51,709 crores. The number of UTI branch offices
increased from 20 in July 1990 to 44 in June 1994. During July 1990-

June 1994, UTI has introduced 35 Schemes of different variety. These

include 10 Monthly Income Schemes / Plans, 4 Deferred Income Unit

Schemes / Plans, 12 Equity Oriented Mutual Fund type closed-end

Schemes (like UGS-2000 and UGS-5000 exclusively for US ‘ 64 unit-

holders, Mastergain, Masterplus, US’62 Mastergrowth and Grandmaster)

as also 4 Equity Schemes/ Plans (under government’s Equity Linked

Savings Schemes). UTI also introduced a number of special Schemes to

cater to special societal / sectoral needs (Senior Citizens’ Unit Plan,

Rajlakshmi UTI Scheme, Children’s’ College and Career Fund and Bhopal
Gas Victim Monthly Income Plan). At present, UTI manages 54 Schemes.

Even after a preferential offer at a 25% price discount to existing US ‘ 64

unit-holders in July 1992, the dividend under US’64 was raised from

25% to 26% in 1992-93. The July sales and repurchase prices of US’64
in 1993 were Rs. 16.00 and Rs. 15.00 respectively. In July 1993 US ’64

unit-holders were given 2:5 Rights offer at a 20% price discount. The
Preferential and Rights offers brought in substantial rise in effective yield

to US’64 unit-holders. Also, during last 4 years period, all fixed income
Schemes have out performed their promises by giving higher capital

appreciation on maturity or bonus dividend. Besides, all the equity funds

of UTI have out-performed market indices. Mastershare, the first mutual

fund type scheme of UTI has provided compound rate of return 48% per
year for the last 7 ½ years of its operation. To the investing public UTI

has emerged as a financial institution for safety, liquidity and

competitive returns. Since UTI does not charge any management fee,

enjoys considerable economies of scale and has very low non-performing

or bad-debt portfolio, it has the lowest intermediation cost (less than 1%

of net asset value). Operating on the principle of “no profit no loss”, UTI
has been able to provide relatively handsome returns to unit-holders.

The highlights of the year’s performance were :

 Mobilization of Rs. 8.227 (Rs. 6,373 face value) crore from 105 lakh
fresh unitholding accounts under eight new schemes (all closed-end)

and fifteen existing open-end schemes.

 Meeting rep--- and redemption of units of the value of Rs. 11.57 (Rs.
7,643 face value) crore

 Fresh investment in fresh primary corporate debt and equity issues

amounting to Rs. 2,994 crore under all schemes.

 Dividend of 20% and a first ever bonus of 1:10 under US-64.

 Dividend rates Under ULIP (16.5%), CRTS (18%) and GCGI (13%)
maintained at the previous year’s level.

 Dividend under CGS-93 and US-95 increased to 13% and 13.5%


 Dividend under Mastershare (16%) maintained on the enlarged capital

(due to 1:5 bonus issue in the previous year).

 Between July 1, 1995 and June 30, 1996 while the BSE National

Index and BSE Sensex appreciated by 12.7% and 15.1% respectively,

NAVs of UTI’s equity – oriented schemes recorded an appreciation of

6.4% to 25.8%.

 Continued low gross operating cost rate of 0.79% of total investible

funds and reduction of cost per account so—branch offices, and 20

new franchise offices.

 Opened two new branch offices, and 20 new franchise offices.


(Rs. in cores)
Year Sales Outstand Out Investibl Reserves Cross Cross Income
u i s e & I E D
n n t F P n x is
d g a u r c p tr
e u n n o o e i
r n d d v m n b
a it i s i e d t
ll c n s it u
S a g i u ti
c p u o r o
h it n n e n
e a it
m l h
e o
s l

1964-65 19.14 18.73 1.32 24.67 0.07 1.53 0.23 1.29

1965-66 2.15 19.80 1.35 25.94 0.11 1.83 0.22 1.60

1966-67 9.24 27.05 1.70 33.86 0.22 2.52 0.31 2.08

1967-68 15.34 41.16 2.19 48.70 0.38 3.67 0.51 3.03

1968-69 17.16 56.65 2.69 65.40 0.59 4.83 0.58 4.20

1969-70 22.83 77.45 3.35 88.30 1.03 6.39 0.67 5.78

1970-71 18.00 92.23 3.84 105.14 1.77 8.41 0.80 7.64

1971-72 15.11 104.75 4.35 119.26 2.43 9.68 0.81 8.92

192-73 23.17 124.95 5.08 141.96 3.17 11.80 0.99 10.91

1973-74 30.64 151.92 5.97 172.09 4.25 14.53 1.33 13.19

1974-75 17.24 148.81 6.01 169.95 3.59 13.05 1.82 12.78

1975-76 28.97 166.80 6.37 176.66 3.99 16.02 1.77 14.01

1976-77 34.59 193.34 6.81 206.84 4.54 20.34 1.89 17.22

1977-78 73.27 253.39 7.70 279.91 8.48 26.49 2.52 22.81

1978-79 101.53 347.47 9.04 393.70 26.09 39.04 2.65 31.05

1979-80 57.85 390.89 9.86 455.30 37.88 47.55 2.44 38.74

1980-81 52.10 425.35 10.47 513.97 52.03 60.12 3.03 47.98

1981-82 157.37 555.46 12.23 679.24 76.14 78.50 2.14 59.34

1982-83 166.90 706.91 13.66 870.24 98.20 101.69 5.05 86.44

1983-84 330.16 1021.33 14.92 1261.33 150.46 142.64 6.61 126.29

1984-85 756.19 1757.30 17.01 2209.61 299.87 257.05 11.77 214.92

1985-86 891.75 2586.39 20.38 3218.34 445.08 389.97 15.39 316.79

1986-87 1261.06 3726.11 29.79 4563.68 567.18 524.58 22.21 427.86

1987-88 2059.42 5449.58 38.56 6738.81 940.72 840.90 41.36 68.68

1988-89 3855.01 8905.11 48.58 11834.65 2075.10 1687.02 64.03 1246.46

1989-90 5583.59 13391.73 65.12 17650.92 3155.19 2142.84 98.26 1895.15

1990-91 4552.95 16409.33 102.73 21376.48 3695.28 2821.59 119.35 2354.98

1991-92 12182.35 24815.41 235.73 3105.69 5133.29 5035.95 2895.64 3011.99

1992-93 6492.00 30649.46 301.07 38976.81 7708.24 5532.76 265.96 3491.64

1993-94 10712.00 339303.0 378.15 51708.85 9874.15 7098.97 318.83 5179.47


* High sales was due to the encouraging response to equity oriented schmes
which mobilise about Rs. 7000 crore.

Over the years, the fund development pattern has considerably changed. In the initial
years, equity share s accounted for about 40% and preference share 8%, the rest being

in Government securities bonds of public corporations and money market instruments.

By early eighties, the share of equities declined to about 25% preference shares to about

3% and debentures to 26%. But share of deposits with corporates and other loans
increased to 25% and that of money market instruments to 21%. By the end of 80s, the

percentage of preference equities had become insignificant. Share equity declined to

21% and debentures to 24%. The shares of loans and deposits were 16%, money

market instruments 20% and Government securities 18%. At present, the broad
distribution of investible funds is: Equities 49.95%, Debentures 24.63%, Loans and

Deposits 87%, Government securities 11% and Money Market Instruments 6%. The
trend is towards equity in line with growing interest in equity amongst investors.

The change in the pattern of deployment has been consequence of the

changing composition of the different types of Schemes managed by UTI.

The introduction of mutual fund type schemes led to an increase in the

share of equities. Fast growth of US’64 required corresponding growth in

liquidity to meet repurchase and dividend payment needs. Need for liquid
fund increased also because of the increased number of maturing fixed –

income schemes. Again, introduction of large number of fixed income

Schemes demanded growing amount of investment in loans and

corporate deposits as well as privately placed debentures. The increased

volatility of demand supply and interest rates in various financial

markets, warranted more flexible fund deployment pattern. As a result

of rapid growth in investible financial sector, UTI has become a major

player in the stock government securities, corporate credit and money


Under the Act, UTI has been provided with wide scope of business.
Besides selling and purchasing units, UTI is authorized to invest in

securities, grant loans an advance, accept / discount bills of exchanges

and other mercantile instruments, purchase / sale / issue of loan

participation certificates, special deposits with companies acquire

immovable property, provide leasing and hire purchase, merchant

banking and investment advisory services, buy / sell and deal in foreign
exchange and doing any other kind of business connected with

mobilization of savings or investments which Central Government may

decide. Not only has UTI increased its lending operations and started

providing underwriting and other advisory services in the course of the

last ten years, it has also taken up an active developmental role by

promoting / co-promoting new institutions like Stock Holding

Corporation of India, Credit Rating and Information and Services India

Ltd, Investment Information and Credit Rating Agency of India Ltd.,

Discount and Finance House of India Ltd., Over-The-Counter Exchange

of India Ltd. Risk Capital and technology finance corporation, Technology

Development and Information Company Ltd.

Earlier, in 1988, UTI had set up UTI Investors Advisory Services

(registered with the Securities Exchange Commission of USA) as also the

UTI Institute of capital market (engaged in training constancy and

research). The progressive liberalization of the Indian economy has

thrown open new opportunities for financial services businesses in India.

These has had an impact on UTI’s objectives of encouraging savings and

investments. The service needs of growing investors of UTI demanded

both upgradation of technology of UTI’s operations and synergical inter-

linking of various financial service businesses. In this context, and in

keeping with the Mission is to provide “single window” service to savers

and investors, UTI has already initiated a technology upgradation project

which involve on-line computerization of operations inter-linked across

offices through telecommunications. Also, UTI has promoted UTI Bank

Ltd. All these are expected to help remove bottlenecks-internal and

external, to improve services to the contribute to healthy growth of

capital market.


UTI Security Exchange Limited (UTI-SEL) reported an excellent year of operation.

UTI-SEL’s clients include large domestic institutions, Mutual Funds, FIIs and fairly a
large number of retail clients. In its seeking business it achieved an impressive turnover

of Rs. 1266 crore on the capital market segment and Rs. 1483 crore in the debt
segment. For the first full year of operation in 1995-96, it reported a net profit of Rs. 1.5

crore. The company proposes to be a Depository Participation with the National

Securities Deposition Limited and through the VSAT network across in the country

desires to provide value added broking services to the clients.

In its second year of operation, UTI Bank experienced all-round growth,

with the year-end deposits reaching Rs. 926 crore and the advances Rs.
557 crore. It reported a profit of Rs. 11.21 crore (Rs. 2.3 crore in 1994-

95). The Bank is a member of SWIFT User Group in India and has got
permission from the DOT to set up its own leased line called UTI-Bank

Net for voice. Data and fax transmission.

As a category Register and Transfer (R&T) Agency, UTI Investor

Services Limited (UTI-ISL) handles nine UTI schemes, covering a unit

holders base of 11.5 lakh accounts through its four offices on the
metropolitan cities. It plans to open fifteen smaller branches over the

next one year to provide focused service to investment. During the year,
UTI-ISL earned gross income of Rs. 2.18 crore and made net profit of Rs.

3.3 lakhs.

During 1995-96, UTI Institute of Capital Market conducted various

courses in the areas of Investment Management, Merchant Banking,

Corporate Finance & Treasury Management and few client need based

training for clients like Bank National of Paris, Business Standard,

Indian Revenue Service, UTI-SEL, etc.

UTI Investment Advisory Services. An US Securities Exchange

Commission registered company providing investment services support

to UTI’s India Growth Fund, made a net profit of Rs. 70.70 lakhs in
1995-96, as compared with a net profit of Rs. 115.17 lakhs in the

previous year.


The Trust operates as an autonomous body, it is not subject to

Government intervention. In the last 30 years, UTI had, only 5 Chairman

all appointed by the Government. Though UTI is not a public sector

undertaking (and not covered by the definition of “State” under Article 12

of the Constitution). UTI, as a matter of societal convention, has been

following certain policies relating to salaries and wages, reservation in

employment, use of Hindi and internal vigilance procedure which are

broadly in line with policies of public sector units.



US-64 is the mother launched by UTI in 1964. Today, in its 35 th year,

this continues to be UTI’s most popular Scheme. The Scheme offers

perfect blend of various benefits such as attractive income, capital

appreciation, ready liquidity together with additional benefits by way of

special offers, as also tax benefits. All these benefits makes US-64 a
GOOD BUY for all category of investors throughout the year.


Investment can be made by any adult individual Resident singly or along

with one more adult on joint or either or survivor basis, parent/step

parent/court guardian on behalf of Resident minor, HUF, Trusts,

Societies, Bodies Corporate, Companies and Banks as also for the benefit
of Mentally Handicapped Adult.


The face value of each unit under the Scheme is Rs. 10/-. Application

can be made for a minimum of Rs. 2,000/-. There is no maximum limit.


Though the face value of unit is Rs. 10/- per unit, actual sale and
repurchase will be effected at the sale and repurchase prices fixed by the

Trust every month.


US-64 has been a package of Multiple Benefits.

The Scheme has a history of paying consistently attractive income as is evident from the following chat.

Year Income (%)

1990-91 19.50

1991-92 25.00

1992-93 26.00

1993-94 26.00

1994-95 26.00

1995-96 20.00 Plus 1:10 Bonus

1996-97 20.00 1:10 Bonus

Over and above the income, US 64 holders have also been offered
additional benefits like:

In the year 1990 A high growth scheme UGS 2000

In the year 1991 A high growth Scheme UGS 2000

In the year 1992 Preferential offer of additional units @ Rs. 11.20

In the year 1993 2:5 Rights offer @ Rs. 12.80 at a discount of

20% on July 93 sales price

In the year 1994 1:5 Rights offer @ Rs. 14.80 at a 20% discount

on Sept. 94 sale price

UGS 2000 Bonus 1:4 Bonus on July, ’94 O/S Units

And Rights
1:1: Rights units on the enlarged capital @ Rs.

UGS 5000 Bonus
1:5 Bonus on 4th Oct, ’95 O/S Units
And rights
1:1 Rights units on the enlarged capital issued
at par
In the year 1996
1:10 Bonus
In the year 1997
1:1 Rights at par in April 1997
UGS 2000 Rights

If gains of all these exclusive offers are taken into account, the return to

the US-64 holders works out much more than the income yield. However,
we may mention that there is no guarantee of past gains being repeated

in future.


Units under the Scheme are listed on OTCEI, DSE and wholesale debt
segment of NSE.


For individuals

Taxation of income and capital appreciation under the Schemes will be

subject to prevalent tax laws. Income from units under all Schemes of

the Trusts including “US-64” will enjoy deduction from income upto an
overall limit of Rs. 15,000/- under Section BOL of Income Tax Act, 1961.

Any long term capital gains arising out of the investment in Scheme will
be subject to treatment indicated under Sections 48 and 112 of the
Income Tax Act, 1961. Value of investment in units under the Scheme is

fully exempted from wealth tax.


Investment of entire or part of net consideration arising out of transfer of

long term capital assets in US’64 will be eligible for capital gains tax

exemption under Section 54EA of Income Tax Act 1961 subject to

availability of repurchase/transfer/pledge only after three years from the

date of acceptance.


Investment of entire or part of capital gains arising out of transfer of long

term capital assets in US’64 will be eligible for capital gains tax

exemption under Section 54EB of Income Tax Act 1961 subject to

availability of repurchase/transfer/pledge only after seven years from the

date of acceptance.


Units are approved securities under Section 11(2)(b) of the Income Tax
Act, 1961. Eligible Trusts investing in units will, therefore, quality for

necessary tax exemption in respect of income and corpus under Sections

11 and 13 of Income Tax Act 1961.


Under Section 194K of the Income Tax Act 1961, UTI will be required to

deduct income tax at source @ 15% from the income payable to

individual, HUF and other unitholder not being companies under the

Scheme, if such income exceeds Rs. 10,000/- during the financial year.

No dedication of tax will be made for Eligible Institutions which are

covered under Section 11 or 12 or 10(22) of 10(22A) or 10(23) or

10(23AA) or 10 (23C) of the Income Tax Act, 1961 on the basis of a

declaration in the formal provided in application form.


ULIP is a unique Plan offering an unmatched package of benefits.

1. Tax rebate on every contribution.

2. Life insurance cover.

3. Accident cover upto Rs. 30,000/- irrespective of the size of your


4. Attractive returns

5. Maturity bonus.

Under this Plan a person have a choice of either a 10 year Plan or a 15

year Plan have to be particulared an aggregate amount called Target

Amount by investing uniform annual or semi-annual installments over

the period of the Plan. The minimum target amount of investment is Rs.
6,000/- and maximum Rs. 75,000/-. The largest amount can be in

multiples of Rs. 1,000/-, 1,500/- for the 10/15 years period respectively.

Every year one have to will contribute a fixed sum of money during the

period of the Plan. This amount in turn is used to pay a small premium
to the Life Insurance Corporation and the rest is invested in Units which

earns an income which is also reinvested every year. At the end of the
Plan period one will be paid the cash equivalent of the Units standing to

your credit and maturity bonus.

For a 10 year Plan you have to be above 12 years of age and below 55

years and 6 months. If you want to join the 15 year Plan the upper age
limit is 50 years and 6 months.

Even if the person is physically handicapped the can join the plan
subject to a lapse of 5 years from the date of event and holding gainful

employment at the time of application.

If something happens to the person unfortunately, before completion of

the Plan period then his legal heirs or the second person will be entitled
to receive the following.

1. The cash equivalent of Units in your credit.

2. The amount of life insurance cover.

3. The amount of accident insurance cover (if death occurs due to



Under Section 88 of the I.T. Act 1961, a tax rebated of 20% of the

amount you contribute to ULIP subject to maximum contribution of Rs.

60,000/- and a tax rebate of Rs. 12,000/- p.a. If one withdraws from the

Plan without contributing for minimum period of 5 years, the tax rebate
allowed under this Section will be withdrawn. The tax rebate for
contribution is available to the person as well as for the membership of

his spouse and/or children. Also under Section 80L of the I.T. Act 1961,
for income from ULIP, enjoy a deduction from income upto a limit of Rs.


Any long- term capital gains arising out of the Scheme will be subject to

treatment indicted under sections 48 and 112 of I.T. Act 1961. The value
of investments in Units under this plan is fully exempted from wealth


The personal accident insurance cover is in addition to the life insurance cover. It is up to the maximum of
Rs. 30,000 irrespective of the number of membership or target amount. The amount of personal accident
insurance cover will be as follows:

Events Amount of Accident Insurance (Rs.)

1. Death due to accident 30,000

2. Total permanent disablement 30,000

3. Loss of both eyes or both hands or both 30,000

feet or one hand and one foot, or one eye

and one hand or one foot due to accident.

4. Loss of one eye or one hand or one foot 15,000

due to accident


The plan has declared an income of 16.5% for last 5 years i.e. from 1993
to 1997. For the year 1997-98 the income declared is 16.5%. The income
so declared will be reinvested in further units after deduction of tax, if



On completion of the full plan period, you will receive a maturity bonus.
For a 10 year plan you will get a maturity bonus of 5% on the largest

amount and for a 15 year Plan it is 7.5% . If a member has paid all the
contributions under the Plan and dies in the last year before completing

10 years or 15 years period, the maturity bonus will still be payable.


Maturity Proceeds
Age at entry 10 Year Plan (Rs) 15 Year Plan (Rs.)
12-20 years 1,56,245.69 2,29,637.82
25 years 1,56,182.88 2,29,351.66
30 years 1,55,868.75 2,28,203.05
35 years 1,55,177.65 2,26,193.13
40 years 1,53,795.49 2,22,029.53
45 years 1,51,219.63 2,14,851.01
50 years 1,47,135.94 2,03,796.12
55 years 1,40,727.67 -
* on a Target Amount Rs. 75,000/-.


The children’s Gift Growth Fund is a gift that keeps growing with the
years. When the child becomes an adult, the gift matures. So the child

gets the money when the needs it most to pay for higher education, to
help set up a business or practice or to help set up a home.
The gift can be given by any adult i.e. parent, relative, friend, a guardian

appointed by Court of Company, Body Corporates, Registered Society,

Eligible Trust to any child under 15 years of age. The money you gift

under this Scheme is converted into units.

The face value of each of these Units is Rs. 10/- and the gift can be given

in multiples to 100 Units. Units are sold at par at Rs. 10/- throughout
the year except when the books are closed during the month of June.

The minimum number of Units you can gift is 200. There is no maximum

It is advisable to name an alternate child so as to void legal procedures in

the unfortunate event of the death of the first named child.


There is an assured income@ 12% p.a. money becomes, more than 10.80

times of the original investment in 21 years.

The gift matures when the child reaches the age of 21 years. Till then,

just nobody- not even parents can touch the gift or accumulation, which
ensures undisturbed growth of the gift till the child attains adulthood

and is in a position to handle it.. At maturity the child can deal with the
units independently.


0.25% of the fresh sales mobilised under the scheme every year shall be

set aside as contribution to DRF of the trust, additionally 0.055 of the

NAV at the beginning of the year shall be contributed every year.

Income Tax Exemption

Income from units under all schemes of the trust including ‘CGGF’ will

enjoy deduction from income within an overall limit of Rs. 15,000/-

under Section 80 L of Income Tax Act, 1961. Tax liability on income

from units, during the minority of the Child, will be on either of the
parents whose income is greater. As the Child attains the majority, the

tax liability will be on the Child. Under section 194K of Income Tax Act,
1961 UTI will be required to deduct income tax at source @ 15% from

the income payable under the Scheme to the donee child., if such income
exceeds Rs. 10,000/- during the financial year.

The Gift Tax Act, 1958 has abolished the levy of gift tax in respect of gifts
made on or after 1st October 1998. Thus, fifth of units of UTI are fully

exempt from levy of GIFT Tax without any upper limit General.


UTI BOND FUND (UBF) is an open ended pure debt scheme. The
objective of the Scheme is to provide attractive return to the investors

through capital growth so as to achieve utmost tax efficiency and high

liquidity. The entire investment of the Fund will be in debt and money

market instruments. The income and growth will be ploughed back and
reflected in Net Asset Value.

UTI Bond Fund was initially offered for sale from 4 th May, 1998 to 17th
June, 1998. The Scheme has now been made open ended from 18 th July,
1998. The sale of units under the Scheme will be kept open throughout

the year except during the book closure not exceeding 45 days in a year.

The face value of a unit under the Scheme is Rs. 10/- Sale price will be

the applicable NAV on daily basis without any sales load. Applications
should be for a minimum of Rs. 10,000/-. There is no maximum limit.


Sale/Repurchase at NAV all the year round. For repurchase before one

year a Deferred sales charge upto 1.5% will be levied.

NAV of the fund will be declared daily and will be available on the next


Folio Account maintained to facilitate Systematic Investment Plan.


Amount mobilized shall be invested in debt instruments and money

market instruments.


Total annual recurring expense charged to the Scheme excluding initial

issue expenses and redemption expenses but including administrative

expenses, contribution shall be subject to the following limits.

(i) On the first Rs. 100 crores of average daily net assets – 2.25%

(ii) On the next Rs. 300 crores of the average daily net assets – 2.00%

(iii) On the next Rs. 300 cores of the average daily assets – 1.75%
(iv) On the balance of the assets – 1.50%.


It is an Open end Scheme and hence there is no date of termination.

However, UTI may wind up the Scheme under the following


(i) Happening of any event which in the opinion of UTI requires the
Scheme to be wound up.

(ii) 75% of the members pass a resolution that the Scheme be wound
up of

(iii) If SEBI so directs in the interest of the members

Such winding, if so, shall be with due notice to SEBI and in newspapers

as per Scheme provisions


No deduction of Tax at source

Tax benefit U/Ss. 48 & 112 of Income Tax Act, 1961 on capital gains

from capital appreciations.

Capital Gains Tax exemption under Sections 54 EA//54 EB of Income

Tax Act, 1961 subject to the provisions of lock in –period under the said
5. UTI MEP 1999

The next to the series of ELSS schemes from UTI is now open. UTI has
consistently come out with such tax saving schemes for the last few

years and has been the largest accumulator of funds in the category too.
In accordance with the guidelines the fund aims at growth by investing

over 80 per cent of the funds collected in equity and related instruments.
The scheme has also made a provision for investment in derivatives, and

in foreign markets. This will of cou8rse be dependent on government

permission to do so, and as and when it is permitted in India.

Since the scheme is under a lock in period for three years liquidity will be
available to the investor only when repurchases commence under the

scheme in the year 2002. Initial expenses upto a maximum of 6 per cent
will be charged to the scheme. Of the ELSS schemes launched in the last

few years MEP 95 has delivered an annualized return of a negative 5 per

cent, MEP 96 has returned 0.7 per cent, and MEP 97 has returned a

negative 8 per cent annualized. UTI is also offering compensation for

early investment in the scheme. For those who invested in the scheme in

January the fund is offered an incentive of 3.5 per cent. This has now
goes down to 2.5 per cent of the month of February, and will go down

further to 1.5 per cent for entire March.


Scheme MEP 1994

Open 1 Jan 1999

Nature Close ended equity-linked scheme

Closes 31st March 99.


UGS 10000, the growth internal fund from the unit trust of India has posted a good
performance so far. The fund launched in May 98 has appreciated by 18.3 per cent

while the sensex has in the same period declined by 15.63 per cent. The fund has over
50% exposure in Fast Moving Consumer Goods and close to 22% in Pharmaceuticals.

Moreover, it has close to 5% exposure in engineering companies, 5% in computer

software, 3.8% in consumer products, 3.5% in lubricants, 2.8% in chemicals and

plastics. The scheme managed a subscription of close to Rs. 70 crore in its initial offer


The US – 64 scheme with a corpus of Rs. 22000 crores and 24 million

unit holders, accounts for a third of UTI’s operations. The total corpus of
the other MFs taken together is less than one – fourth of the UTI’s.

Formed by an act of the Parliament in 1963, UTI launched the US – 64 in

1964. It was the first scheme in India to channel public savings into non-

deposit instruments like equity and corporate debt at a time when capital
markets were too underdeveloped in this country to undertaken this

task. Two years after it started of, the fund started facing its first crisis.

 What happens when you buy a US –64 unit at Rs. 14 0. The face
value of Rs. 10 goes into the Capt. Account and the rest Rs. 4 goes

into the share premium reserve. So the US – 64 managers now have

Rs. 14 in investible fund and they buy shows and debentures for the

entire amount. After a year the value of the shares fall to Rs. 12 . The
fall in market value, Rs. 2, is debited from the reserves to provide for

the loss that is incurred.

 On the June 30th, US – 64 reserves turned negative – i.e. the scheme’s
investments fell so low as to entirely wipe out the reserves. At that

stage, the reserves stood at minus Rs. 1090 crores.

 Subramanyam’s claims

(a) Fund had hidden reserves because was very high

(b) Because UTI held large blocs of shares, they could be sold to takeover
tycoons or to the companies themselves at very high prices.

30th June, 1994:

Quoted invested (share and debentures) - Rs. 8, 254 crore.

Named at - 18,983 crore

Outstanding capital - Rs. 12,019 crore

Reserves and Provisions - Rs. 6,312 crore

Estimated NAV - Rs. 24.18

Between 30 June ‘ 94 and 30 June ’98 NAV of US – 64 fell from 24.17 to

9.45, a fall of 60.9%.

 Anyone who keeps money in UTI today in betting not on the ability of

UTI to make good the losses, but on the willingness of the government
to guarantee that units will be bought back at the current repurchase

price. But if that trust is to be sustained the government must come

out with more concrete, legal assurance and a clearer rescue plan

than what it has so far.

 So if the government is serious about saving US- 64, it must state
that this is the kind of money it is willing to put up if used be.

 According to Subramanyam, between 30 June and 30 September 98 ,

after the market revived, US 64’s fund managers managed to

reduce the hole with reserves from – Rs. 1090 crore to – Rs. 150 crore.

 US- 64 owns equity in 1400 firms and since only A group stocks and

a few B group stocks are of any interest to the market now, the rest
are probably worth only a fraction of their quoted value.


 Regarded as an outpost of finance ministry. Whenever the market has

fallow, UTI has been asked to prompted it up at shareholder’s expense

(like a FI).

 In the current crisis, UTI stepped into huge purchase to share it up.

 Retail investors we now withdrawing money because they doubt US –

64 will be able to continue repurchases at the brave price it is now


 4 years ago, a controversy erupted when UTI bought a huge block of

shares at a price exceeding Rs. 400.


(i) Beholder to UTI and might hesitate to sell US – 64.

(ii) Bought US – 64 because they bought it a good place to park their


Sensible option: UTI is to tell US – 64 holders that the NAV is Rs. 9 ,

and cut the repurchase price to that level overnight.

Asset management company (AMC) : the company can be capitalized

with Rs. 2000 crore and the real estate held by US- 64 can be valued

and transferred to the area.


UTI and SEBI were statutory bodies. US – 64 continued to be

unregulated and its net asset value (NVA), alone among all mutual fund

schemes, continued to be undisclosed. So investors went on investing in

it believing it was all income scheme with little when it was in fact

heavily invested in equity.



 Recommendation for tax exemption on income from investments in

the scheme.

 Making US – 64 a government – guaranteed savings instrument.

 Extending stand by facility from the government for need- based

liquidity support to the scheme.

 And the creation of an SPV to transfer all non-performing investments

to another entity.
UTI at a Glance

UTI's Mandate

The impetus for establishing a formal institution came from the desire to increase the
propensity of the middle and lower groups to save and to invest. UTI came into
existence during a period marked by great political and economic uncertainty in India.
With war on the borders and economic turmoil that depressed the financial market,
entrepreneurs were hesitant to enter capital market.
The already existing companies found it difficult to raise fresh capital, as investors did
not respond adequately to new issues. Earnest efforts were required to channelise
savings of the community into productive uses in order to speed up the process of
industrial growth.
The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that
would be "open to any person or institution to purchase the units offered by the trust.
However, this institution as we see it, is intended to cater to the needs of individual
investors, and even among them as far as possible, to those whose means are small."
His ideas took the form of the Unit Trust of India, an intermediary that would help fulfil
the twin objectives of mobilising retail savings and investing those savings in the capital
market and passing on the benefits so accrued to the small investors.
UTI commenced its operations from July 1964 "with a view to encouraging savings and
investment and participation in the income, profits and gains accruing to the
Corporation from the acquisition, holding, management and disposal of securities."
Different provisions of the UTI Act laid down the structure of management, scope of
business, powers and functions of the Trust as well as accounting, disclosures and
regulatory requirements for the Trust.

A Unique Structure

As a Trust without ownership capital and an independent Board of Trustees, UTI

represents a unique organisational innovation. Under the provisions of the first UTI
scheme, Unit Scheme 1964, certain institutions were to contribute to the Scheme's
initial capital, which is redeemable at the discretion of the Trust at such values as may
be decided by the Government of India.
The contributors to the initial capital of Rs. 5 crore for US-64 Scheme were Reserve
Bank of India (RBI), Other Financial Institutions, Life Insurance Corporation (LIC), State
Bank of India (SBI) ; its subsidiaries and other scheduled banks including a few foreign

In February 1976, RBI's contribution was taken up by the Industrial Development Bank
of India (IDBI). The institutions were provided representation on the Board of the
Trustees of UTI. Under the provisions of the Act, Chairman of the Board would be
appointed by Government of India. The Board of Trustees overlooks the general
direction and management of the affairs and business of UTI. The Board performs its
functions based on commercial principles, keeping in mind the interest of the unit
holders under various schemes.

Since UTI does not have any share capital, it operates on the principle of "no profit no
loss" as all income and gains net of all costs and development charges ultimately go
back to investors of respective schemes.

Unit Trust of India (UTI) is India's first mutual fund organisation. UTI manages funds
amounting to Rs.49,655.57 crore being the market value of investments as on 28th
June 2002 (provisional) from 28.96 million investors under its 72 schemes. The faith
and confidence of investors stems from UTI’s commitment, as reflected in its long track
record of over three decades, to ensure its investors safety, liquidity and attractive yield
on their investments.
UTI was set up in 1964 by an Act of Parliament. UTI presently occupies a special
position in Indian capital market. With a servicing and distribution network of 54
branch offices, 266 Chief Representatives and about 67,000 agents, UTI provides the
complete range of services to its investors.
UTI has set up associate companies in the fields of banking, securities trading, investor
servicing, investment advice and training, towards creating a diversified financial
conglomerate and meeting investors’ varying needs under a common

More than thirty years have elapsed since the creation of the Unit Trust of India (UTI),
an institution which was conceived and which remains the one to channelise the
savings of the small investor into industrial development.

During these three decades UTI has become a household name, providing unit holders
a safe avenue for investment in a wide variety of funds and at attractive returns.

Shri M Damodaran
Executive Directors
Shri D S R Murthy

Shri B S Pandit
Shri S K Dasgupta

Dr S S Nayak

Dr P P Shastri

Shri M Parameswaran

Shri Ajeet Prasad

Shri S Ravikumar

Shri M Sebastian

Shri K Madhavakumar

Shri A K Sridhar

Shri R Rangarajan

Board of Trustees

Shri M Damodaran, Chairman Unit Trust of India

Shri K L Khetarpaul, ED RBI

Shri U K Sinha, Joint Secretary Department of Economic Affairs

Shri S H Bhojani

Shri P N Shah

Shri K Narasimha Murthy

Shri R S Lodha

Shri D T Pai

Shri M R Mayya
Product Variety/Range

Apart from equity, debt and balanced schemes, UTI also manages schemes aimed at
meeting specific needs like:
* Low cost insurance cover (ULIP).
* Monthly income needs of retired persons and women.
* Income and liquidity needs of religious and charitable institutions and trusts.

* Building up funds to meet cost of higher education and career plans for children.

* Future wealth and income needs of girl child and women.

* Building savings to cover medical insurance at old age.
* Wealth accumulation to meet income needs after retirement.

Reaching Investors

Individual household investors account for 99% of UTI's investor accounts and about
65% of unit capital of UTI schemes. Products are distributed through a marketing force
of about 67,000 commission-based canvassing agents trained to explain the products
and provide related service support to investors.
Today, these agents are supervised by 266 Chief Representatives who guide the
investors, organize, train and motivate the agents in their respective areas of operation
(specified districts).
Investors under various schemes of UTI are now serviced through 54 UTI branches, 183
collection centres and offices of 4 Registrar and Transfer Agencies appointed by UTI.
Besides there are 57 franchises offices, which accept applications and distribute
certificates to unit holders. UTI has set up its own associate company, UTI-Investor
Services Limited (UTI-ISL), to meet the growing needs of unit holder servicing.
UTI is also currently implementing a technology upgradation program, involving
networking of on-line computer systems at UTI's offices, and offices of Registrars and
Transfer Agencies. This would enable UTI to improve service quality significantly.

UTI inaugurated its first Touch Screen Kiosk on 29th October 2001. In the first phase,
static information such as NAV, sale, repurchase prices of the schemes, product details,
objective of the scheme and portfolios are available on the Touch Screen Kiosk at UTI’s
Lotus Court UFC. In the second phase, online investor query for various details on the
investment made with UTI, interfacing with investor databases on various schemes
using the existing browser based query system or generic system etc., will be
introduced. In the third and final phase, integration would be started on completion of
the data migration of all the schemes into the Generic System Database. It would
enable the investing public to do online financial transactions such as Sale, Transfer,
Repurchase, etc. of units using personalized Smart Cards / Debit Cards / Credit Cards
on various UTI schemes.
UTI publishes weekly / daily NAVs for all its listed schemes and offers a prospectus for
every scheme. It also publishes half yearly results for all schemes and releases
information on portfolio as also largest shareholding for growth schemes and Unit
Scheme 1964. UTI adheres to disclosure requirements specified by SEBI. As on June
30, 2001 out of 74 domestic schemes, 68 are fully compliant with SEBI guidelines.

Investment guidelines

Consistent with the UTI Act, investment decisions of UTI are guided by investors'
interests. While operations are guided by the UTI Act, 1963, investments are subject to
prudential exposure norms laid down by UTI regulations. It cannot invest more than 10
percent of a particular scheme corpus in the equity of any one company. UTI's
investment decisions are backed by inputs from independent groups set-up for equity
research and investment appraisal.

A Conglomerate with a vision

As a distinctive financial institution, UTI manages funds raised through common

investible vehicles and at the same time provides companies financial services,
including underwriting.
To create a diversified financial conglomerate and to meet investors’ varying needs
under a common umbrella, UTI has set up a number of associate companies in the field
of banking, securities trading, investor servicing, investment advice and training.
* UTI Bank Ltd (1994)--the first private sector bank to be set up under RBI guidelines.

* UTI Securities Exchange Ltd (1994)--the first institutionally sponsored corporate

stock-broking firm.
* UTI Investor Services Ltd (1993)--the first institutionally sponsored Registrar and
Transfer agency.

* UTI Institute of Capital Markets (1989)--the first such institute in Asia, excluding

* UTI Investment Advisory Services Ltd (1988)--the first Indian Investment Advisor
registered with SEC, US.

Consistent with financial sector deregulation, UTI has plans to enter into insurance,
pension and credit rating businesses.
Global links

UTI pioneered the off-shore fund investment in Indian securities. The India Fund,
launched in 1986 as a closed-end fund, became a multi-class open-ended fund in 1994.
Thereafter, in 1988, UTI floated the India Growth Fund which is listed on the New York
Stock Exchange. Both India Fund and India Growth Fund have increased their corpus
through rights issues. Besides the Columbus India Fund, launched in 1994, UTI
launched the India Access Fund, an Indian Index Fund (tracking the NSE 50 index) in
UTI International Limited is a 100% subsidiary of Unit Trust of India, registered in the
island of Guernsey. This company was set up with the primary objective of
administration and marketing of various offshore funds managed by UTI as also to act
as the management company for these funds as required by the Guernsey Law. UTI
International Ltd has an office in London to market UTI's offshore funds to institutional
clients in UK, Europe and USA. It is also responsible for developing new products as
well as new business opportunities of UTI. This office also looks after ongoing investor
relations with foreign investors and has succeeded in greatly improving communication
between UTI and its clients and distributors abroad. UTI International Ltd has played
an important role in launching three new offshore funds of UTI - the India IT Fund Ltd,
the India Debt Fund Ltd and the India Public Sector Fund Ltd.

To cater to various needs of NRI investors based in the Gulf region, UTI has a branch
office at Dubai. The branch office covers all the six GCC countries viz. UAE, Oman,
Kuwait, Saudi Arabia, Qatar and Bahrain. The Dubai office of UTI Acts as a liaison
office between our NRI investors in the Gulf and UTI offices all over India. Besides
providing information on current and new schemes of UTI, it also co-ordinates with UTI
offices in India for all after-sale requests of unitholders/agents.

In the recent past, UTI has extended its support to the development of Unit Trusts in
other developing countries, like Sri Lanka and Egypt. Besides providing technical
advise, UTI also participated in the equity capital of the Unit Trust Management
Company of Sri Lanka.

Research strength
UTI has its own research set-up to deal with different areas. The areas of research
analysis cover macro-economy, capital markets, financial sector and mutual funds.
Industry and corporate performance are also covered by Equity Research.
UTI Institute of Capital Markets conducts training programmes for the financial
community and helps to develop modern and scientific approach towards investment
management. It also serves as a forum to discuss ideas and issues relevant to the
capital market besides publishing research papers relating to capital market.

Into the future

Institution building UTI has played a significant role in institution-building. It has

helped promote/co-promote many institutions that would aid the healthy development
of the financial sector, and the economy in general. These institutions include-
* Infrastructure Leasing ; Financial Services (ILFS).
* Credit Rating and Information Services Ltd (CRISIL).
* Stock Holding Corporation of India (SHCIL).
* Technology Development Corporation of India Ltd. (TDICI).
* Over-the Counter Exchange of India Limited (OTCEI).
* National Securities Depository Ltd (NSDL).
* North Eastern Development Finance Corporation Ltd (NEDFCL).

Note: All figures provided are provisional in nature.

A Question Of Trust

Sebi must ask the government to fund UTI’s shortfalls

The Unit Trust of India is hurtling from crisis to crisis. Just when people thought the
worst was over for the country’s largest and oldest mutual fund institution, a fresh
crisis — surrounding the shortfalls in its monthly income plans — has gripped it. In
fact, the latest round of problems UTI is wrestling with is more than just shortage of
funds. It concerns UTI’s very foundation, its ownership and, its “paternity”. The
Monthly Income Plan or MIP problem has not sprouted overnight. Ever since the mid-
nineties, a debate has been raging in the financial sector over whether the anachronism
of assured return schemes are to be continued with at all. But oblivious of these
warnings, UTI’s management, over the years, has been merrily launching such schemes
without bothering about the repercussions. In taking stock of the crisis that has
befallen UTI, it is necessary to clearly identify the problems, and what now needs to be
done in the interest of that one segment of the population for which UTI was set up in
the first place — the small investor.

It is, indeed, pathetic that today the country’s largest mutual fund
institution is faced with a situation where none, including the
government of the day, is keen to pick up the tabs for the huge shortfall
which the MIPs will face, estimated at around Rs 4,000 crore. The so-
called sponsors, particularly the Industrial Development Bank of India
which for long has been seen virtually as the mentor of the Trust, have
cited legalese and sought to opt out of paying for the shortfall in the
MIPs. And now, there are signals emanating from the finance ministry,
too, that it may not be very keen to foot the bill. For the thousands of
unit holders, what then does the future hold?

To my mind, the UTI crisis reflects equally poorly on the Securities and
Exchange Board of India, as it does on anyone else. For MIP-97 alone,
Sebi has recently ruled that the shortfall in that particular scheme must
be met from UTI’s Development Reserve Fund. But a decision on the
other MIPs has been kept for later. For some years now, despite the fact
that UTI was set up under an Act of Parliament in 1963, and began
functioning in 1964, Sebi, which acquired its own statutory powers only
in 1992, has been clearing its schemes. In 1996, assured return schemes
were stopped, but Sebi again allowed them to resurface in 1997, with the
shortfall guaranteed by the DRF of the Trust. It is, indeed, surprising
why Sebi chose never to envisage a situation where even the DRF may
run out of funds, which is certain to be the case this time. What happens
if the DRF itself has no money? Who steps in then? The market
regulator, typically short-sighted, presumed that the DRF would always
remain in the money and did not bother to address that issue when it
allowed such schemes to be launched again in 1997. Experts who have
studied UTI over several years agree that this is the result of a colossal
failure to understand UTI’s problems and their implications.

Without going into the merits of IDBI’s legal argument that it is not UTI’s
sponsor, it is worthwhile, however, to take a look at the enormous clout
it has enjoyed over the years in UTI. While appointing the chairman of
UTI, the government consults the IDBI. The UTI executive trustee or ET
is also an IDBI appointee. As many as four trustees on the UTI board are
IDBI appointees, while two are elected, one is from the Reserve Bank of
India and one each from the Life Insurance Corporation and the State
Bank of India. So, you have a situation where as many as five and a half
(if one took the consultative role in the appointment of chairman into
account) members out of 11 are those where IDBI has a role. Even in the
executive committee, the powerful body which takes daily decisions at
UTI, the chairman and ET apart, there are two trustees who are IDBI
nominees. Yet, IDBI is not a “sponsor”. Why? Because it bought the RBI
stake in UTI only in 1976, and was not involved in setting up UTI in the
first place.
Who, then, is UTI’s real parent? For years, the government and UTI’s
management have basked in the glory of millions of unit holders putting
in their hard-earned monies in UTI schemes in the clear belief and faith
that UTI is a government institution. And for decades, until the advent of
other mutual funds, UTI was instrumental in spreading the capital
market culture across the country. There’s also another interesting
point. Section 3 of the UTI Act says that the government shall “establish”
a corporation known as the UTI. And what does regulation 2(x) of the
Sebi mutual fund regulations say? It defines a “sponsor” as any person
who, acting alone or in combination with a body corporate, “establishes”
a mutual fund. Even if one takes the Sebi definition of the sponsor, the
government, which has “established” UTI, is its sponsor!

The point, therefore, is, having established UTI, reaped benefits from it
and having failed to prevent it from hurtling towards a precarious
financial condition, can the government now pretend it is not the
ultimate owner of the Trust? Sebi, under its new chairman GN Bajpai,
now has a lifetime’s chance of rectifying the regulator’s earlier error of
allowing assured return schemes to continue. Keeping in view the past,
and with an eye firmly on the future, Sebi must pass a clear direction
that the government is the ultimate owner of UTI and must, in whichever
way fit, meet the shortfall in the MIPs. This will go a long way in proving
Sebi’s independence as regulator, and the fact that it has the small
investor firmly in focus. Only that can undo the massive damage done to
the psyche of the small investor who, after years of being wooed by
government and UTI alike, finds himself out in the cold. As for the
existing, reluctant sponsors, their contributions to the capital would
have evaporated anyway. They should now be “freed”, and a new set of
entities brought in to run UTI in line with the realities of the market in
which it operates.
The Lok Sabha Speaker Mr GMC Balayogi announced in the house on Friday that the Joint Parliamentary
Committee on the stock market scam, headed by Bharatiya Janata Party member Prakash Mani Tripathi,
would also go into all matters connected with the Unit Trust of India.

PSS, 3 others remanded to judicial custody till Aug 7

Former Unit Trust of India chairman PS Subramanyam, the mutual fund’s suspended
executive directors and stock broker Rakesh Mehta were on Friday remanded to judicial
custody till August 7 by a special court which rejected their bail plea.

Redemptions for US-64 rise on third day

A steady rise in the redemptions of US-64 units of the Unit Trust of India was witnessed
on Friday after the Trust offered a new plan for redemption on Wednesday.

Irda likely to favour life insurers for pension funds

With the Unit Trust of India crisis playing havoc with public confidence, the Insurance
Regulatory and Development Authority seems to have decided to play safe on the
pension funds issue.
(Reuters) - The government may have to bail out the country's largest
mutual fund operator for a second year running because of a shortfall in
the value of guaranteed return schemes, analysts said on Thursday.

They said state-run Unit Trust of India (UTI), which stunned investors
last year when it froze redemptions from its flagship fund, may now face
problems with maturing assured return schemes hit by bad debt and
plunging stock markets.

UTI Chairman M. Damodaran promised investors they will get their

money. "The investor has been given an assurance and that will be
honoured," he told Reuters. Finance Minister Yashwant Sinha has
delivered a similar pledge.

But analysts are debating whether UTI, which manages nearly half the
fund industry's $20 billion of assets, will be able to find the money for
the redemptions or whether the government will have to bail out the fund

The schemes, favoured by retirees and safe-haven investors, boast

returns of 9.25 percent to 14 percent -- generous against a backdrop of
falling interest rates and a sliding stock market.

UTI's new woes centre around its 16 assured monthly income plans
(MIPs) and a fixed-return scheme. Two MIPs and the fixed-return scheme
mature on June 30 and three more MIPs mature later this year.

The 16 MIPs offer assured monthly or yearly income for one to seven
years, and a few also guarantee repayment of the initial capital at par or
the market value, whichever is higher.

But mutual fund tracking companies, which have seen the makeup of
Bombay-based UTI's assured return scheme portfolios, say many of their
investments are in doubtful debt.

"These funds invested in poor quality bonds, many of whose issuers

turned defaulters. This resulted in unrecoverable credit," Dhirendra
Kumar, managing director of fund-tracking firm Value Research, told
Reuters. "Adding to their woes has been the slump in the equity

UTI, which declined to comment on its financial situation, created a

national uproar less than year ago when it suspended redemptions from
its flagship fund, US-64, for the rest of 2001.

It later agreed to redeem US-64 units at a price above the market value,
bankrolled by the government. But it set a ceiling on the amount
investors could redeem.

UTI has declined to reveal the gap between its combined redemption
obligation for the first three schemes maturing and their market value
but analysts estimate the shortfall at 6.83 billion to 10.5 billion rupees.

Value Research estimates the total shortfall for UTI's 16 MIPs at more
than 35 billion rupees.

Damodaran said UTI can draw on its development reserve fund (DRF),
worth around 8.5 billion rupees, which consists mainly of fees it takes
for managing its 80-odd schemes and some real estate assets.

"As and when these schemes come up for redemption...the DRF will have
the money to make good the shortfall," said Damodaran, appointed by
the finance ministry after the previous chairman resigned following the
US-64 scandal.


Damodaran would not comment on media reports quoting unnamed
government officials as saying UTI might use some of the reserve's assets
as collateral for raising loans to meet potential shortfalls for future
redemptions in MIPs.

Analysts say between 3.81 and 41.63 percent of the assets in UTI's
various MIPs are "non-performing".

Debt in India "is considerably less safe than in countries with a fast
judicial system because bad asset recovery is cumbersome here," said
independent financial analyst Devangshu Datta.

While UTI may be able to use the reserve fund to meet redemptions later
this month, the reserves may not be sufficient for all its MIPs, analysts

"Initial schemes will be honoured and the rest will depend on the
markets or possibly on government support," said Sandeep Parwal,
director at SPA Capital.

"The government will eventually have to bail out UTI for a variety of
reasons, the primary one being the unambiguous guarantee of capital
and returns in many cases," said Kumar.

In any event, analysts say UTI should not have promised assured

"Equity and debt are unpredictable and do not provide a platform for
guaranteed returns," Kumar said.
MUMBAI, JULY 24. The Unit Trust of India will be adopting a three-
pronged approach to resolve the current imbroglio which has engulfed
the largest mutual fund manager in the country.

``Our strategy would include restructuring the organisation,

restructuring the schemes wherever necessary, especially Unit Scheme-
64 (US-64) and bringing in more professionalism into the organisation,''
said Mr. M. Damodaran, Chairman, UTI. He was hopeful that
amendments to the UTI Act 1963 would be ready by the coming winter
session of Parliament.

Speaking to `The Hindu' today, Mr. Damodaran said, ``My basic priority
is to create a climate of confidence and to empower officers to do their
assigned jobs. We have already made a few changes in this regard.'' UTI
has brought back Mr. A. K. Sridharan, general manager, in charge of its
equity research cell who advised the top brass against investing in
Cyberspace Ltd. He was transferred to the zonal office following this

Finding a simile in `Hindu undivided family' Mr. Damodaran said, ``US-

64 is the Indian undivided family''. Elaborating on his three-pronged
strategy, the new UTI chief said that among its schemes which require
restructuring, US-64 has top-most priority. ``The Deepak Parekh
Committee recommendations are being studied by us and we are taking
ideas from it,'' he added. He also said that the corporation positioning
committee (CPC) headed by Mr. Y. H. Malegam is providing direction for
the restructuring of the organisation and decide on how this organisation
should be positioned.

``We are involved in the process of business process re- engineering,''

said Mr. Damodaran. The need to provide superior service to the unit
holders is being felt by the UTI. In UTI, 40 million unit holders are
serviced from 54 branches and four registrars and transfer agents.
However, it was not able to centralise data base of all schemes because of
limited availability of leased lines and integrated services digital network
(ISDN). ``Now it has become possible with ISDN and leased lines. UTI has
already started creating centralised data base connecting all our offices
which will be very useful for the retail investors,'' he added. UTI will have
its own ISDN and leased lines by September-end.

UTI is also getting a software specially developed for it which will help the
Trust to service all the unit holders under the 84 schemes and future
schemes that may be launched from time to time. This software will also
help marketing through branches to customers by offering other
products changing the format of branches. Currently the branches
undertake marketing as also back-office services to the unitholders. The
focus of branches will be now be changed to ``investor-centric'' services
and marketing of UTI schemes. The new information technology system
will recognise investors if they provide basic details like name and
address rather than recognising investors by certificate numbers.

``We will give investor identification number (ID) to facilitate easy

transaction in one's investment with UTI,'' Mr. Damodaran said. UTI is
also expecting unit holders would be able to access their account
information through internet by February 2002. Eventhough UTI took
these proposals to its board in July 1999 and software development was
started as early as August 1999, the Trust is now moving in this
direction in an aggressive manner to instil confidence among investors
especially in the retail segment. ``Once the payment gateways are
available we intend to provide facility to buy/sell and switch units from
one scheme to another,'' he added.

UTI is also setting up kiosks at its branches. The pilot project has
already commenced. These are touch screen kiosks and will give
information about UTI schemes in different languages. In the first phase
UTI will give information about products. In the second stage it will give
account information and in the third phase transaction facility. It will be
initially launched in the branches and after successful implementation
``we intend to keep this kiosks at shopping centres, hotels, railway
stations and airports, thus providing round-the-clock access.'' In the
next one month UTI would be installing these kiosks in Mumbai and
later in a phased manner in other parts of the country.
So the government finally did stand by the Unit Trust of India. After several weeks of
acting indifferent and trying to pretend that UTI was nobody’s child, the Government of
India gave the guarantee on the back of which UTI could raise the Rs 1,000 crore from
the State Bank of India to tide over the immediate crisis of the shortfalls in its assured
returns schemes. This column has made it clear more than once that UTI is a
government entity and there is no alternative to a quasi-public sector role for the
institution, given its legacy and the constituency it serves. That, however, is not to
mean that it should not function as a business entity in tune with market realities. By
serving up the guarantee, the government has clearly indicated that whatever be the
legal position, UTI is indeed the child of the Government of India.

One year after the US-64 crisis broke, it is time to take stock of what’s
really happening at the country’s largest mutual fund. A year after the
Trust faced what was clearly its worst-ever crisis, UTI’s chairman M
Damodaran, who came in one Sunday afternoon last July to take charge
of the tottering institution after a distinguished stint as a turnaround
manager for the three weak public sector banks, has shown that the
government was, indeed, right this time in the selection of the candidate
for the top job at UTI. Though Mr Damodaran still won’t say anything
about his continuance at UTI, the finance ministry has already given him
another two years to continue the work he has started at the Trust.

Consider the present situation at UTI. US-64 is currently well within

control, with a couple of government-backed administered repurchase
schemes in progress to stem outflows. The schemes have worked and
there’s no real panic or rush from investors to cash out of the scheme.
Besides, US-64 has also outperformed the sensex ever since it went NAV-
based from January 1 this year. And this time, the Trust has been able
to muster courage, resist playing the perilous game of playing to the
galleries, and has skipped dividend for US-64. With the government
guarantee coming in (which was clearly Mr Damodaran’s real test), the
immediate problem of the shortfalls in the two assured returns schemes
which matured on June 30 has also been addressed. UTI has also
become the first public sector entity to introduce a variable pay structure
in its ranks, rewarding the efficient employee for his efforts. It has also
set up, for the first time, an asset reconstruction fund for the recovery of
its non-performing assets. This internal fund does not collect any monies
from the public and therefore does not have to get bogged down by
regulations and can smoothly supplement the efforts of the Trust on the
recovery front. UTI’s landmark move to keep the books of its MIP-95
scheme open for two more years even after the scheme has matured so
that benefits of NPA recoveries are passed on to investors as and when
they happen, has just become policy for the mutual fund industry, with
Sebi endorsing this and asking all other mutual funds to go the same
way. Tribute enough to UTI’s innovative skills.

But despite this lengthy list of pluses, it’s not as if it’s smooth sailing
from now on. The worst is clearly over, but now comes the problem of
how to tackle the shortfalls in the remaining assured returns schemes
and the crucial issue of restructuring UTI itself. The government can
either provide a similar guarantee the next time round (after a clear
assurance once again that UTI will follow all the conditions), or can ask
financial institutions to provide the funds. But whatever the case, once
the government has taken the right step of standing by UTI and its
millions of investors, something similar can be expected the next time
round. On the issue of restructuring, this column had earlier pointed out
that privatisation is not a feasible alternative. What is required, now that
UTI is gradually getting back on track, is to ask the cash-flush
institutions like the Life Insurance Corporation and some others to chip
in and set up the asset management company and ensure UTI is run on
lines like any other mutual fund. Mr Damodaran and his team at UTI
have already proved to the finance ministry that it was not wrong in
backing UTI in its time of crisis. UTI’s large family of investors will be
hoping that the new finance minister, Mr Jaswant Singh, continues to
repose the same faith in the Trust which his predecessor, after some
initial reluctance, showed in the institution
FOR millions of investors, India’s biggest and oldest manager of mutual
funds, Unit Trust of India (UTI), has shed its middle name. On July 2nd
its open-ended fund, US-64, with assets of 127 billion rupees ($2.7
billion), suspended sales and purchases of units—until January, it said
—in a move prompted by falling share prices and the exit of some large
The result: around 20m furious investors, with allegations of
mismanagement hurled at the government, which controls UTI. The
government promptly sacked UTI’s chairman, Pavagada Subramanyam.
And the finance minister, Yashwant Sinha, promised a partial rescue for
small investors, the details of which were announced on July 15th.
Under the rescue plan, investors can sell up to 3,000 of their units to the
fund, from August 1st. There is a government-supported floor price,
which rises the longer investors stay with the fund. Otherwise, the
government fears a crash, since the 37-year-old fund has holdings in
many of Bombay’s listed companies. UTI’s new chairman, Meleveetil
Damodaran, says the fund might sell shares privately rather than on the
open market.
Persuading investors to stay in the fund will not be easy. Those who
stayed after the previous government rescue, three years ago, have lost
money. That rescue came after a government-appointed expert panel
suggested that US-64 should be restructured as a bond fund; today,
about two-thirds of its portfolio is still in shares. Another suggestion,
that the fund should be regulated on a par with India’s private funds,
was ignored. Lack of regulation seems to have encouraged its managers
to make risky investments.
US-64 failed to adapt to a changing market. Interest rates fell after
financial deregulation in the mid-1990s, and the fund invested heavily in
shares in an attempt to boost returns. Even as the market fell, the fund
continued to quote unit prices above its net asset value. Many now fear
another shock when it declares the market value of its assets next
The fund’s rescue underscores the nature of the moral hazard that
comes from the government’s control of India’s biggest financial
institutions, including the banks and insurance companies. Most of
India’s household savings—around one-tenth of GDP—are locked into
these inefficient and poorly managed institutions. Capital allocation and
the economy suffer as a result.
The government has taken some steps to reduce its role. Privately
managed mutual funds (unit trusts) have cut UTI’s share of the market,
from over 90% to 57% today. Several foreign insurers have set up shop
this year. In March, Mr Sinha cut the fixed returns on government-
managed pension funds. The next step should be to deregulate pension
funds and let private managers run them. A smaller US-64 may, in the
end, prove no bad thing.

Joint Parliamentary Committee, probing the stock scam, is likely to fix

responsibility on former Finance Minister Yashwant Sinha for the UTI
fiasco and name Ketan Parekh as the "key player" in the stock scam.
Short of pin pointing Sinha as the main person responsible for the freeze
on Unit Trust of India's flagship scheme US-64 in June 2001, a
voluminous report of the committee, to be tabled in Parliament on
Thursday is expected to give a detailed account of the then Finance
Ministers' "failure" to take timely action, sources said.
JPC, which has already zeroed in on the 'Big Bull' Ketan Parekh for the
pay-order scam in cooperative bank and the stock scam in March 2001
in its draft report, is likely to name him as the key player in the multi-
crore stock scam.
The report has also upbraided the Department of Company Affairs for
not being able to come out with details of the corporate companies
involved in the scam thereby allowing them to go unchecked.
The JPC, which was set up last year, was given three extensions as its
scope was enlarged to include the probe into UTI fiasco besides the
securities scam.
The report is widely believed to have come out with far-reaching
recommendations to give more teeth to Securities and Exchange Board of
India to prevent recurrence of such scams.
Taking serious note of not fully implementing the recommendations of
the previous JPC report that probed the 1992 stock scam, the current
report is likely to suggest that government come out with a six monthly
progress report on the implementation of these recommendations.

Parliament on tuesday gave its approval for bifurcation of Unit Trust of

India into two companies -- UTI-I and UTI-II -- with Finance Minister
Jaswant Singh assuring Rajya Sabha that government would meet all
commitments to investors.
The Unit Trust of India (Transfer of Undertaking and Repeal) Bill 2002,
already passed by the Lok Sabha, was approved by the Upper House by a
voice vote after the mover of the statutory resolution opposing the
Presidential Ordinance of October 29, Manmohan Singh (Cong), withdrew
it and Left parties walked out in protest.
The minister said UTI-I would not be floating any new scheme and all
existing commitments would be met by the government, while the UTI-II
would be started as a Sebi regulated, asset managed and market
competing scheme.
He assured the House that there would be no retrenchment of UTI
employees. All of them would be put on the UTI-II attendance register
with an option that they could take six months to decide if they wanted
to take voluntary retirement.
Singh said the employees may also be considered for absorption in the
newly set up UTI Bank in which the State Bank and the Punjab National
Bank would have investments.
While informing the House that the process has already been started to
punish the guilty responsible for mismanaging UTI affairs, the Minister
said the matter has already been referred to the Central Bureau of
Investigation and "nobody will be spared if found guilty".
Referring to an allegation by members that somebody in the Prime
Minister's Office had been involved in the UTI scam, Jaswant Singh said
if "any person was involved, it would have been found so far during CBI
He assured the House that findings of the Joint Parliamentary
Committee, which is looking into the UTI affairs also, would be
considered by the government and its recommendations implemented, if
The Minister said UTI was the first government sponsored mutual fund
in the country with social content and government commitment.
However, over the years, as many as 33 mutual funds have been started
in India.
He said the government was neither distancing itself from governance of
UTI, as alleged by some members, nor abdicating its responsibility.
However, the government was bifurcating UTI into two. While it would
remain committed to part I for UTI's social content, it would be allowing
the second part of UTI to act as a mutual fund in competition with
private players under Sebi regulation.

Taking the government to task for rushing through the Unit Trust of
India Ordinance without waiting for the report of the Joint Parliamentary
Committee on stock scam, senior Congress member Manmohan Singh
made a strong demand for restructuring of UTI and demanded protection
to millions of investors in the flagship US-64.
Moving a statutory resolution in the Rajya Sabha disapproving the UTI
(Transfer of Undertaking and Repeal) Ordinance, 2002, he said the
government should have waited for the JPC report before bifurcating UTI.
Singh said by choosing the Ordinance route, the government had
scuttled the process of eliciting the views of the members of Parliament
and obtaining an opinion from the Standing Committee of Parliament.
The former inance Minister said macro-management of the economy has
to share the blame for what happened to the UTI or the capital market
and citing the fall in Sensex, he said it was because of the government's
inability to manage expectations of the investing community.
While stressing the need for a holistic, more consistent and longer term
view of the entire matter to remove the uncertainty and instability of the
capital market, he favoured a medium term policy in this regard.
Referring to the proposed divestment of Nalco, Singh wanted to know if
there was any assurance that people who would take over the company
would not exploit natural resources beyond a certain limit and in a
manner which was harmful to the ecology. This was the idea behind
nationalisation of coal mines, he explained.
He said millions of people, mostly the retired persons, widows and
charitable trusts, which had invested in the US-64, were bewildered as
they had suffered huge losses. "What is happening in UTI has shaken the
confidence of the investors," he said pointing out at the sharp decline in
the dividend rate of UTI after 1996-97 and the fall in its Net Asset Value.
Singh asked the finance minister to assure the House that the Bill
seeking to replace the Ordinance, moved by him, did not foreclose the
options of restructuring UTI.
The Congress member wanted to know the mode of running UTI-I,
because even after bifurcation of UTI, a large portfolio remained with the
Unit-I scheme and people wanted an assurance that the portfolio would
be properly managed.
He said the Unit-II scheme should be Sebi compatible and added a fiscal
and monetary system, which instilled confidence in the minds of
investors was needed to give a new dynamism to the country's economy.

The government on Thursday said that it may consider divestment in

UTI-II after 3-5 years but did not commit to any new assured return
scheme for UTI-I after the bifurcation of the Unit Trust of India, for which
the Lok Sabha passed a bill.
"I will neither announce nor rule out anything", Finance Minister
Jaswant Singh told the House while participating in a debate on UTI
(transer of undertaking and repeal) Bill 2002.
He was queried by members if UTI-I would become extinct after
redemption of US-64 and other schemes and whether UTI -- II would be
The Bill was passed by voice vote after Basudeb Acharia's (CPM)
resolution disapproving the Ordinance brought by government last
month was rejected.
Advocating a strong and efficient regulatory mechanism for mutual funds
under market operations to check any casualty like that happened in
case of UTI, Singh assured that government would fully back all the
assured return schemes that would be part of UTI-I.
He, however, said UTI-II would comprise operations of all the net asset
value based schemes under Sebi regulation developed for mutual funds
operating in the country.
Conceding that the first salvage operation for reviving UTI had failed
prompting the government to bring the present Bill for bifurcation of the
Unit Trust of India, Singh said since September UTI had received net
inflow of Rs 3000 crore (Rs 30 billion), a mark of mute confidence,
against the total inflow of Rs 2,700 crore (Rs 27 billion) in the whole of
the last fiscal.
Singh said UTI - I would be managed by the government through an
administrator who would be assisted by advisors and added, "the present
administrator is a good officer from the finance ministry and will
continue to administer."
UTI-II would be run on a three-tier principle to check any conflict of
interest between promoters like Life Insurance Corporation, State Bank
of India and Punjab National Bank who operate their own small mutual
Apart from sponsors, the new mutual fund would have trustees as the
second layer and the management operations as the final layer, he said.
The government would have no liability whatsoever in this as investors
put in their money in NAV based funds for higher returns and they
would have to bear the risks, he said and pointed out that 37 MFs with
net assets of Rs 113,000 crore (Rs 1.130 billion) were operating in India
of which UTI's share was Rs 44,000 crore (Rs 440 billion).
Stating that he was a votary of free market and free enterprises, Singh
said this could flourish only with an efficient and strong regulatory
mechanism and UTI -- II would be governed by Sebi regulations for MFs.
Asked if UTI-II would be privatised as had been stated by a senior official,
Singh said the bill was not intended for this but "three to five years down
the line government can consider divestment in this."
On members' apprehensions that UTI-I would be extinct soon, Singh
said: "I will not talk of the demise of UTI-I and it would not be possible to
announce any kind of new scheme for it."
Taking full responsibility for the debacle in UTI, Singh said such
accidents happened when the economy was transforming from a
controlled one to market oriented.
"It is to prevent casualties like this, we need a strong regulatory
mechanism. Therefore, the government has brought the present Bill," he
The Bill provides for repealing the UTI Act of 1963 and bifurcation of
assets and liabilities of UTI into two parts, i.e. specified undertaking and
the specified company, thereby distancing the government from the UTI
and mutual fund activities.
Apart from the transfer and vesting of initial capital of the UTI to the
government, the Bill also seeks exemption to the specified undertaking
from Income Tax for five years from the appointed day.
Reiteratiing that the government's commitment to US-64, which he
described as a unique scheme where investors put in their money on
trust with the government, Singh said the government would fully cover
the US-64 and other assured return schemes.
On division of infrastructure assets, Singh said division would be worked
out carefully and interests of UTI-I would be fully safeguarded, and
assured protection of interests of all employeees.
Dismissing the charge that recourse to Ordinance was taken to assure
investors of their returns and redemption under the assured return
schemes including US-64 in view of coming elections in Gujarat, he said
it was to fulfill commitment to investors on assured schemes and move
the government away from market operations of the NAV based mutual

The government on Thursday assured the Lok Sabha that there was no
attempt to bailout Unit Trust of India as Opposition members pilloried it
for ''mismanagement'', saying the small investors were the worst hit.
Moving the Unit Trust of India (Transfer of Undertaking and Repeal) Bill,
which seeks to replace an Ordinance in this regard promulgated on
October 29, Finance Minister Jaswant Singh said: ''there is no bail out of
While it was thought necessary to honour the commitments made by the
UTI to its investors with regard to the US-64 scheme and assured return
schemes, it was also decided to restrict the central government's liability.
The Centre had also decided to distance itself from the UTI by bifurcating
the UTI into two parts -- Unit-1 comprising of the guaranteed portion and
Unit-2 comprising of all net asset value based schemes --and repealing
the UTI Act of 1963.
In a statutory resolution disapproving the bill, Basudeb Acharia, CPM,
deprecated the government for coming out with the Ordinance on the eve
of the Parliament session. It was ''unwarranted' and not in the interest of
the country, he said.
He wanted to know why UTI had been split into two, one exclusively
under the control of the government and one left to the financial
institutions. ''This is a step towards privatisation of UTI,'' he said.
Congress member E M S Nachiappan said the UTI mess was a result of
the mismanagement of the NDA (Natioanl Democratic Alliance)
The Bill provides transfer and vesting of initial capital of the UTI to the
central government, and refund of the initial capital to initial
contributors to such extent "as it may determine having regard to the
book value and assets and liabilities of the UTI."
It also provides for exemption to the specified undertaking from Income
Tax for five years.
Singh said over a period of time, certain weaknesses had crept into the
UTI. He said high dividends and sale and repurchase price of units
unrelated to the actual earnings and other shortcomings in UTI's
working had led to fall in the NAV of the units.
''These inherent weaknesses coupled with the problems of the capital
market in March, 2001, resulted in US-64 Scheme facing substantial
redemption during the months of April and May, 2001, forcing temporary
suspension of the sales and repurchases'' under this scheme for a period
of six months up to December last year, he said.
Subsequently, a limited repurchase facility was allowed in the interest of
investors. He said the central government had decided to meet the
difference between the administered repurchase prices and the NAV.
However, in view of the depressed capital market, the problems of the
UTI persisted, Singh said.
Supporting the measure to repeal the UTI Act as it would help small
investors, Priya Ranjan Dasmunsi (Cong), however, attacked the
government saying lack of vigilance by it led to the fall of UTI.

A Crisil report says the overall amount required to bailout the Unit Trust
of India would be much less than the around Rs 14,000 crore (Rs 140-
billion) already committed.
According to the Crisil Centre for Economic Research mid-year outlook
for 2002-03, the nature of the schemes being bailed out, the timing of
their redemption as well as the direction of the asset markets will
determine the burden on the exchequer.
It may be recalled that the government's rescue package is directed at
two set of schemes: the assured return schemes, which assure terminal
capital and a fixed dividend, and the Unit Scheme 64.
In the case of US-64, UTI would be redeeming its units at an average
price between Rs 10 and Rs 12 under its special administered price for
holdings of up to 5,000 units.
The Crisil study says that this price works out to Rs 11.40 depending on
the investor-mix and time of redemption.
The difference between the weighted average price and the current net
asset value is the shortfall per unit, which needs to be bridged under the
government's bailout plan.
The Crisil study adds that if US-64's equity portfolio rises by 141 per
cent in 2004 then the fund house will not require a bailout. In case the
scheme's equity portfolio gains 20 per cent, then the bailout package
would be just Rs 4,920 crore (Rs 49.20 billion).
In case the equity portfolio falls by 10 per cent, the bailout sum for the
government would rise to Rs 6,240 crore (Rs 62.4 billion). But if the
equity portfolio remains unchanged, the bailout package would be Rs
5,820 crore (Rs 58.2 billion).
"Would there be a sharp rise in the redemption in the first-half of 2003-
04? That seems somewhat likely but the government might mitigate the
redemption pressure by providing additional incentives to investors to
hold onto their US-64 units by giving significant tax sops both in the
next Budget," the report says.
Meanwhile, the 21 ARSs have had two problems, which have led to the
need for the government support. These schemes have promised returns
in the range of 13-14 per cent, while their actual earnings are between
7.5 per cent and 8.5 per cent.
Secondly, these schemes have the assurance of capital protection on
maturity. The Crisil report says that the important issue with the ARSs is
the timing of their redemption. These are spread over the next four years
and consequently the fiscal impact would be distributed over this period.
The cumulative amount to be provided to the ARS adds to Rs 1,332 crore
(Rs 13.32 billion) for 2002-03.
"If we use this redemption schedule for ARS to build the worst case
scenario for the current year (2002-03), then the total bailout in 2002-03
would be just Rs 3,390 crore (Rs 33.9 billion). If the scenario persists in
2003-04 and full redemption of US-64 happens, then the burden would
be Rs 6,800 crore (Rs 68 billion) in the next fiscal. These are clearly
extreme situations and the actual impact could be well smaller," the
report notes.
Finally, the direct impact of the budget would depend on the specific
mechanism employed for funding the bailout. There are two possible
models, the Crisil report says.
One is that UTI-I issues bonds to the government at a certain rate of
interest, say 7 per cent. This appears as a capital expenditure in the
budget and creates an asset.
But if UTI is unable to service the debt, it would entail a provision on the
revenue account.
Under the worst case scenario, this would be Rs 3,391 crore (Rs 33.91
billion) and Rs 240 crore (Rs 2.4 billion), respectively, in 2002-03. So, the
net addition to the expenditure in the 2002-03 Budget would be roughly
Rs 3,628 crore (Rs 36.28 billion).
In case UTI-I issues bonds to banks and financial institutions on the
back of government guarantees, then this would be a contingent liability
on the government's books and the impact on the expenditure would be
only to the extent of the interest payment guaranteed. This works to Rs
240 crore this year, Crisil says.

The Centre will provide an additional sum of Rs 450 crore (Rs 4.5 billion)
to meet the redemption pressure on monthly income plan-MIP 97(IV) of
Unit Trust of India, which has matured on Thursday.
The sum will take the aggregate support provided by the Centre to the
mutual fund major to Rs 950 crore (Rs 9.5 billion) in this fiscal, of which
Rs 500 crore (Rs 5 billion) had been provided to tide over the liquidity
problems of US-64 in the first supplementary budget. The additional
support will be provided in the second supplementary demand for grants
to be cleared by Parliament in the winter session.
The Centre has also provided a guarantee of Rs 1,000 crore (Rs 10
billion) for liquidating the assets in Development Reserve Fund of the
Trust to meet the redemption pressures for MIP-97(I) and (II) in April and
May and the MIP 97 (III) at the end of August this year.
To ensure that the holders of MIP schemes have an incentive to stay on,
the Centre has also held out the carrot of income tax exemption for five
years from the date the ordinance is notified.
The UTI (transfer of undertaking and repeal) ordinance 2002, issued by
the Centre says "no income tax or any other tax shall be payable by the
administrator (of the trust) for a period of five years, in respect of any
income, profits or gains derived or any amount received".
The tax benefit shall be applicable for the 25 schemes of the Trust that
will be administered by an administrator till they are liquidated.
The ordinance also says the administrator of the "specified undertaking"
shall be a person or a body of persons, who would run it on behalf of the
Centre. He would be assisted by a Board of Advisers whose term of office
and fees and others would be decided by the government.
The chairman, or any of the trustees would not be entitled to any
compensation for the premature termination of the UTI in its present
On the issue of compensating the original promoters of UTI, the
ordinance has left the issue to the discretion of the Centre. It only says
the Centre would refund such amount as may be determined by it after
consideration of the book value, assets and liabilities.

The Centre will enter into an agreement with the new asset management
company floated by the State Bank of India, the Bank of Baroda, Punjab
National Bank and the Life Insurance Company to fix a timeframe for its
complete divestment.
"The asset management company will only be a 'transitionary vehicle'
before UTI-II is completely divested," said a senior finance ministry
The three banks and Life Insurance Corporation will contribute 25 per
cent each to the Rs 10-crore (Rs 100-million) paid up capital of the new
mutual fund.
UK Sinha, joint secretary, capital markets said, "It is not the
government's intention that UTI-II be a mutual fund managed again by
the public sector."
The President on Tuesday promulgated the Ordinances for repealing the
Unit Trust of India Act, 1963, and amending the Securities and
Exchange Board of India Act.
The Ordinance to repeal UTI Act will facilitate splitting UTI into two: UTI-
I to be managed by a public administrator and UTI-II, to be ultimately
privatised. The Ordinance to amend Sebi Act will give more teeth to the
capital market regulator.
According to Sinha, the finance ministry has also initiated a due
diligence exercise of UTI-II to decide the amount at which it should be
given to the new shareholders.
"The shareholders will also appoint an independent consultant to
undertake valuation of UTI-II," he said.
The valuation of UTI-II would take into account the quality of its assets
and the total assets under management besides its customer base.
The valuation is expected to be about 7-8 per cent of the assets under
management of UTI-II.
Sinha said the government will not wait for completion of the due
diligence exercise to transfer UTI-II to the new management led by the
State Bank of India, the Bank of Baroda, Punjab National Bank.
The ordinance to repeal UTI Act says there will be an appointed date
when UTI would be bifurcated. Till then, status quo will continue in the
state of affairs of UTI.
The moment the company is incorporated, the assets would be
transferred to it, he added.
The due diligence would be completed within a month or so, said Sinha,
adding that once the assets are transferred to the asset management
company, it would be for the new promoters to appoint a new team. The
chief executive would be appointed by them and his pay scale would be
"They will be able to hire the best talent from the market and there will
be no bar on the quantum of remuneration," said Sinha.
He also said the initial contributors to UTI's Rs 5-crore (Rs 50-million)
capital would be reimbursed. Based on the due diligence and valuation of
UTI-II undertaken by the new shareholders, the government would arrive
at a minimum price at which UTI-II could be divested.
Any amount realised over and above this could be shared by the
government and the four shareholders, he added.
The agreement entered into by the Centre with the new asset
management company would also take care of the compensation of the
four shareholders.
To a query whether any of these three banks or LIC, which have mutual
funds of their own, would be allowed to bid for UTI-II, Sinha said, we can
have a situation where they do not have a majority stake
The ordinance to repeal the UTI Act was promulgated on Tuesday paving
the way for setting up of an asset management company for managing
the net asset value based UTI-II after the split of the country's largest
mutual fund within two months.
Along with the ordinance to repeal UTI Act of 1963, President A P J
Abdul Kalam also promulgated the ordinance to amend the Sebi Act for
providing extra teeth to the market regulator besides enlarging its board.
Following the issue of the ordinance, a notification would be issued for
setting up an AMC with a initial corpus of Rs 10 crore (Rs 100 million) by
Life Insurance Corporation, State Bank of India, Punjab National Bank
and Bank of Baroda with 25 per cent interest each.
The government would carry out a due diligence for UTI-II to enable its
privatisation by the proposed AMC, joint secretary (capital markets) U K
Sinha told reporters.
The chairman and top executives of the proposed company would be
appointed by the new management and the professionals would get
market-linked pay package.
Till the issue of notification for splitting UTI into two, the mutual fund
would continue its operation in the present form.
The equity held by IDBI, the leading stakeholder in UTI, along with other
financial institution and banks would be paid back.
UTI has an equity base of Rs 5 crore (Rs 50 millin) but manages assets
amounting to about Rs 42,000 crore (Rs 420 billion).
Sinha clarified that the AMC to be floated for UTI-II would be a
transitional arrangement and that NAV-based fund would be privatised
in a year or two.
"The proposed AMC floated by Life Insurance Corporation and three
public sector banks is only a transitional vehicle. We don't want UTI-II to
be PSU-run mutual fund," he said.
Sinha did not rule out the possibility of the present UTI chairman M
Damodaran continuing as the chief administrator of UTI-I after the split.
UTI-I would comprise of US-64, all assured return schemes, special unit
scheme of 1999 and the development reserve fund, which would together
amount to Rs 25,000 crore (Rs 250 billion).
UTI-II having about 25 NAV-based schemes has assets under
management amounting to Rs 17,000 crore (Rs 170 billion).
The government has already committed to a bailout package of Rs
14,561 crore (Rs 145.61 billion) to UTI to meet its liabilities on US-64
and other assured return schemes.

The Union Cabinet on Monday decided to bring in ordinances for

amending the Sebi Act and repealing the UTI Act.
The approval for the two ordinances was given by the Cabinet at its
meeting chaired by Prime Minister Atal Bihari Vajpayee, Finance Minister
Jaswant Singh told reporters after the meeting in New Delhi.
The repeal of UTI Act would enable the government to split the Unit Trust
of India into two.
UTI-I will be the old protected UTI comprising of US-64 for which assured
repurchase prices have been announced and return schemes assured.
The UTI-II (the new UTI) will comprise of all net asset value based
schemes, which will have a professional chairman and board of trustees
and will in course of time be privatised.
The government will meet its obligation annually to cover any deficit in
UTI-I and it will be managed by the government appointed administrator
and a team of advisors nominated by the government.
Amendment to the Sebi Act will provide the Securities and Exchange
Board of India limited search and seizure powers for offences like market
manipulation by companies.
On August 31, 2002, the Cabinet Committee on Economic Affairs (CCEA)
approved the long-awaited bailout package for the beleaguered Unit Trust
of India (UTI) to meet liabilities on its flagship US-64 and assured return

Highlights of the bail-out package:

 Bailout package worth Rs 14,561 crore
 Liability on US-64 pegged at Rs 6,000 crore and on assured-return
schemes (like MIPs etc) at Rs 8,561 crore
 Centre commits to taking on liabilities of assured-return schemes
 Dividend and capital gains tax concessions for US-64 in next fiscal in
 Interest to be reset at lower levels wherever option available for
assured-return schemes
 Ordinance to scrap UTI Act in September
 UTI to be bifurcated into UTI-I (sick) and UTI-II (healthy) segments
 UTI-I will handle US-64 and other assured return schemes with
government support
 UTI-II will handle all the NAV-based schemes (without government
support); to come under SEBI scrutiny like other mutual funds
 UTI-I to be run by government administrator; UTI-II by professional
management team
 Eventually, UTI-II will be privatised
Investors in Unit Trust of India's Unit Scheme 64 (US-64) and the
assured return schemes (monthly income plans and institutional
investor schemes) can breathe a bit easier, now that the Government has
finally announced the basic contours of a bail-out package for all of these
Tax sops mulled

The extension of the special repurchase package appears to be an

attempt to retain investors in the scheme.
The Government has announced the following measures for US-64
investors as an incentive to stay on with the scheme after May 31, 2003:
Any dividend received by US-64 from companies would be passed on to
investors. This would not be taxable in the hands of investors.
Exemption from capital gains has been allowed for investors offloading
US-64 units in the market.
US-64 investors will be given the option to take a tax-free bond or a
certificate instead of cash in May 2003 and beyond.
US-64 will be made tradable in the secondary market. But units
redeemed will not be re-issued, as the Government intends to lower the
size of US-64.
The announcement of a special 'tax sops' package for investors in US-64
created hopes of a good deal to go with the special liquidity package
already in place and induce them to stay beyond May 2003, which was
the government's intent.
But the tax benefits announced are not material enough for an investor
to stay with the scheme. Any investor would be better off accepting the
special repurchase price in May 2003 and exiting the scheme rather than
stay with the scheme.
The exemption from tax on dividends received from US-64 is applicable
only for this fiscal. More importantly, it is applicable only for the amount
of equity dividends received by US-64. Such dividends amounted to
around Rs 200 crore in the year ended June 2002 and may be less this
The benefit is likely to be restricted to around 10-20 paise per unit. Thus
the investor may do well to stay on till July 2003, get the dividend, and
then exit at Rs 12 per unit.
Overall, dividend tax exemption is not at all material for investors to
consider staying for any longer.

With the NAV of the fund hovering at around Rs 6 per unit, it has to
register returns of around 100 per cent over the next nine months to
match the returns offered by the package. The possibility of this
happening is remote. An investor may thus be better off redeeming his
units at the earliest opportunity (May 2003) and investing the proceeds
elsewhere despite the lure of tax concessions that are being held out
The tax sops that have been announced could have been more
innovative. For example, for investors who stay with the scheme for a
year or more, any capital loss could have been allowed to be set-off
against any income. Tax laws now allow set-off only against capital gains.
Or, investors could have been given a tax rebate based on the number of
years they choose to stay with the scheme beyond May 2003.
Innovative tax sops that would calibrate the redemption pressure on UTI
were the need of the hour. Such a package would have reduced the
adverse impact on the budget, taxpayers, industry and the capital
market. Unfortunately, the tax incentives are quite immaterial.
Action plan for US-64 investors

With government's bailout of a guaranteed repurchase price, the action

plan for an investor is rather straightforward. As it states that all
commitments would be extended beyond May 2003, this implies that
government will assure return for the future tenure of US-64 and will
also give a tax sop to investors.
Investors holding upto 5,000 unit

For unit holdings upto 5,000 units, it makes sense to stay put in the
fund for sometime (till May 2003), as your downside is protected with
assured repurchase price. You can sell only 5,000 units back to UTI at
Rs 11.30 in October 2002. This price is revised by 10 paisa every month
till May 2003, when its final repurchase price will be Rs 12.

The same plan would apply to investors holding more than 5,000 units.
For these units will be redeemed at an assured price of Rs 10 in May
2003. Keep a close eye at the NAV. Until that time if the NAV crosses Rs
10 -- then it would make sense to take a call on the opportunity. It looks
unlikely, based on portfolio performance alone, as the fund would need
to generate a whopping 69 per cent return from the current level of Rs
5.92 to reach its par value. Unless of course, the fund gets the difference
between the NAV and the assured prices before May 2003.
For MIP investors
The government's announcement that it would meet all the assurances
under the assured return schemes is a big source of relief for unitholders
in the monthly income plans, institutional investors schemes and special
schemes of UTI which carry an assured return, as capital protection is
now assured.
Today, broadly there are two kinds of MIPs -- one which guarantees
capital protection and return for the entire tenure; and the one which
guarantees capital protection but not the returns every year. So in most
cases, you will be better off by staying with the fund till redemption.
Given the promise that assured returns would be met, investors in all of
the assured return schemes should hold on to their current holdings in
the respective schemes till redemption date.
The NAVs of majority of the MIPs and the IISFUS now hover below par (in
some cases 30 or 40 per cent below Rs 10 per unit). An exit at NAV-
based prices at this juncture would mean taking large losses on
principal. A deficit of this order would be difficult to make up if investors
pull out now and invest in alternative debt avenues, as a bail-out is
available from the Government.
The government has indicated that the promised rate of assured returns
may be reset wherever possible. Even if the assured rates are reset at
lower levels, it will be prudent for investors to stay with the schemes, as
it would ensure return of capital, which is the most important
consideration at this point in time.
The shortfall
UTI is running 21 assured return schemes. Of these, 12 are full-term
assured for five years, five are with capital assured at maturity and four
are long-term full assurance schemes of 18 to 22 years' period.
If all the MIPs are allowed to live their full life, the Rs 8,561 crore will not
be enough to meet the shortfall. An internal assessment by UTI too
shows that the present value of this shortfall might touch a whopping Rs
13,739 crores

As per UTI estimates, the current shortfall in 12 fully assured MIPs is Rs

4,213 crore. However, the Trust itself has projected that the shortfall
may shoot upto Rs 5,786 crore by the end of their maturities. These
schemes are maturing between October 2004 and March 2006.
Given the current market conditions and falling interest rates, the
shortfall is expected to shoot up to Rs 1,740 crore. In fact, the equity
component for assured return schemes is around 25-30 per cent, which
is much higher than what would have been appropriate for such
In the current context, this component is not expected to reap much
benefits to the asset value of the MIPs. Against this backdrop, UTI has
approached 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.
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 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
As stated above, the estimated liability in MIPs is Rs 8,561 crore, a
substantial chunk of which pertains to the four long-term fully assured
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.
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 97(4) due for redemption in
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.
Govt plans Rs 10,000 crore UTI bonds
The government has decided to issue 10-year tax-free bonds to banks
and financial institutions and raise Rs 10,000 crore to bail out UTI. The
bonds could carry a coupon rate of seven-7.5 per cent a year and could
be redeemed in the last three years before maturity.

The Finance Ministry had considered issuance of bonds as an option to

meet the government's commitment to the unit-holders of UTI as it will
not immediately impact the fiscal situation. The bond issue will not add
to the government's expenditure immediately and will be cash-neutral.
Several investors of the United Trust of India were left in the lurch, when the payoff
freeze was announced on the popular mutual fund. In a sudden move the largest
mutual fund manager decided to ban sale and repurchase of its flagship US-64 fund
scheme until December because of a mismatch in the price set monthly and the fund's
asset value. UTI also announced that the annual dividend on the scheme, in which 20
million people have invested, would also be brought down to 10 per cent, from 13.75
per cent in the previous year.
The announcement evoked a hue and cry from the section most hit by the US-64
redemption - the middle class, from which investors had invested their entire life
The immediate fall out of the announcement was the resignation of P S Subramanyam
as chairman. While the Securities and Exchange Board of India refused to intervene as
it was a government fund, G K Vassal was asked to take over as the acting chief.
Amidst cries of revoking the decision and the Finance Minister Yeshwant Sinha
assuring the public that all is not lost, the Central government appointed M
Damodaran, a senior bureaucrat, as UTI chairman.
Govt package will boost confidence: UTI chief
Friday, August 30 2002 17:40 Hrs (IST)

Mumbai: Unit Trust of India (UTI) said that the reforms package and financial
assistance of over Rs 14,600 crore announced by the government will help meet
investors' expectations, reinforce confidence in the largest fund manager and provide a
positive trigger to stock market.

The comprehensive package cleared by the government shows its commitment to stand
by the assurances given by UTI to the investors, its chairman M Damodaran said while
responding to the package programme.

Asked about splitting of fund into two companies-US-64 plus assured schemes and Net
asset value-based schemes-Damodaran said at present many NAV-based schemes of
UTI have been doing much better than the competitors from the private sector
especially the sectoral funds like petro and software.

UTI executive director B S Pandit said that the package for flagship US-64 and likely tax
concessions would provide the investors necessary incentive to remain with the scheme
beyond May 2003.

Another executive director D S R Murthy said that assured assistance would make a
difference to the market, which was apprehensive due to uncertainties and selling

Association of Mutual Funds in India (AMFI) chairman A Kurien said that the package
has addressed the immediate worries of the investors who had reposed faith in UTI,
specially senior citizens who had invested their savings in assured schemes.

NAV price of US-64 shocks investors
Friday, December 28 2001 18:53 Hrs (IST)

Mumbai: A low Net Asset Value (NAV) announced by beleaguered Unit Trust of India
(UTI) for its flagship scheme Unit Scheme-64 (US-64) has come as a shock to more than
one crore investors as year draws to a close, casting a shadow on the mutual fund

"Such a low value at Rs 5.94 per unit and Rs 5.81 per unit under reinvestment plan came as surprise",
Association of Mutual Funds of India chairman A P Kurien said on December 30.

"This is likely to have an impact on investors perception but unit holders owning units upto 5,000 have
cushion of limited repurchase facility", Kurien said adding, "it is in their interest to hold onto their
investments till May 2003 when the assured repurchase price will be Rs 12 per unit".

The disillusionment was evident in the reactions of retired persons, housewives saying, "the part of our
money invested in the US-64 went to companies whose credentials were doubtful. It speaks poorly about
investment decisions".

With the NAV of Rs 5.81, our investments of Rs 50,000 (for 5,000 units of Rs 10 each) stands eroded to Rs

The fund managers working with the private and bank sponsored institutions said NAV was worst than
expected and it was the worst nightmare ever seen by the financial sector.

On the prospects for improvement in value of theUS-64, fund managers said, "about 61 per cent of US-64
corpus is invested into equities and with cross-border tension mounting, sensitive index is unlikely to see an
upward movement".

The impact of low NAV on the market sentiments would be very less as this news had been factored in,
they said.

Chronology of the UTI crisis

The Unit Trust of India announced on Sunday a plan to allow small

investors to begin redeeming units in its biggest fund.
The move partially reverses the state-run mutual fund management
company's announced on July 2 to suspend for the remainder of the year
the repurchase and sale of units in its US-64 fund, which accounts for a
fifth of its Rs 575 billion ($12.2 billion) in assets.
UTI's decision to freeze redemptions rattled financial markets, dismayed
the 20 million investors who own units in US-64 and cast a cloud over
the outlook for the Indian stock market and mutual fund industry.
The government and Union Finance Minister Yashwant Sinha have come
under blistering media and opposition attack over the crisis engulfing the
fund. The issue is expected to dominate the monsoon session of
parliament starting later this month.
The following is a chronology of events, charting how the crisis unfolded:
June 2001: A rash of stories appear in financial newspapers noting a
sharp rise in redemptions from US-64. Many reports speculate that UTI
will announce in July that it has cut the annual dividend. Reports also
note unit holders are looking at a potentially even larger decline on their
US-64 investment when UTI begins linking the redemption price to the
fund's net asset value (NAV). Due to the share market's sharp decline in
the six months to June, the fund's NAV is estimated to have fallen below
Rs 10 per unit, about a third less than the redemption price of Rs 14.25
paid in May. UTI expected to begin linking the redemption price to the
fund's NAV by next February.
July 1: A leading financial daily reports that UTI's 16 MIP funds are
trading below par. Other stories claim the NAV of US-64 eroded by
investments in stocks championed by Ketan Parekh, a Bombay-based
stockbroker known as the "Big Bull" for his alleged ability to move the
market. Parekh was arrested in March for fraud. Parekh has denied any
July 2: UTI suspends repurchase and sale of US-64 units for six
months. Also announces annual dividend for past year to June cut to 10
per cent, from 13.75 per cent the previous year. UTI chairman P S
Subramanyam warns that the reserves of US-64 might be "negative".
Subramanyam declares UTI's intention to begin linking the redemption
price to the NAV by June 2002.
July 3: The Bombay Stock Exchange's Sensex closes down 3.3 per cent.
Sinha says that the finance ministry is scrutinising the decision to
suspend redemptions, and will take action if necessary to safeguard the
interests of small investors.
July 4: Under finance ministry pressure, Subramanyam quits as UTI
chairman. K G Vassal, UTI's senior most executive director, appointed
acting head. Review panel set up and told to prepare a report within 15
days. The finance ministry says UTI Act to be amended to bring US-64
under the surveillance of the Securities and Exchange Board of India.
July 5: Four banks, including three government-run lenders, announce
they will loan money to UTI at below-market rates. UTI also sells a large
portion of its bond portfolio to UTI Bank, its banking subsidiary. Both
bits of news help quell greatest immediate concern of financial markets:
that UTI, to raise cash needed to meet redemptions in other funds, may
be forced to sell large chunks of its stock and bond holdings in the
market, causing prices to crash.
July 6: Finance Minister tells parliamentarians an investigation will be
launched into allegations of insider trading in US-64 units ahead of the
July 2 suspension announcement. There was a sharp rise in
redemptions in the April-June quarter by Indian corporations, prompting
allegations companies were tipped off ahead of time.
July 15: UTI board announces all US-64 investors will be allowed to
redeem up to 3,000 units at any time between August 1 and May 2003
under a price formula designed to "pave the way for migration of the
scheme from administered pricing to NAV-based pricing." Government
also announces the appointment of M. Damodaran, a senior Finance
Ministry bureaucrat, to head UTI.
How the Unit Trust of India forfeited the trust of 20 million Indians

Union Finance Minister Yashwant Sinha cannot pass the buck on to P S Subramanyam
after sacking him, argues Paranjoy Guha Thakurta

Union Finance Minister Yashwant Sinha is facing the biggest crisis of his
political career, thanks to his inept handling of another crisis, that is, the
one in the Unit Trust of India. Not just his political opponents, Sinha's
own party members are up in arms against him because of the manner
in which he has dealt with the freeze on transactions in the country's
oldest and largest mutual funds scheme operated by the UTI, the Unit
Scheme of 1964 (US-64).

The Finance Minister has promised an independent inquiry into the

affairs of the Trust. He has also claimed he was kept in the dark by the
top brass of the UTI. But few are convinced by his explanation. On the
contrary, he is being ridiculed for failing to anticipate the crisis, for
ignoring the writing on the wall which was evident to many.

Sinha has put up a brave front and claimed he will not put in his papers.
But his credibility is currently at an all-time low. Even his own
compatriots seem unwilling to take a charitable view of his role in the
US-64 imbroglio. With a committee of thirty-odd Parliamentarians
struggling to conduct an investigation into the recent stockmarket
scandal and with the Indian economy in a tailspin, few would like to step
into Sinha's shoes at this juncture.

On the afternoon of July 9, Sinha hurriedly convened a media conference

at the Press Information Bureau in New Delhi in an attempt to distance
himself and the Ministry of Finance from the US-64 fiasco. He came
through on the occasion as a rather beleaguered man.
At one level, he repeatedly claimed he was not trying to evade his
responsibility to Parliament and the people of India. While asserting that
the buck stopped with him, the Finance Minister nevertheless contended
that he and his Ministry's officials had been kept in the dark about the
July 2 decision of the UTI's board of trustees to suspend for six months
all transactions in the US-64.

This is exactly what the Finance Minister claimed: "I'm telling you with
full sense of responsibility that the Ministry of Finance was not taken
into confidence about the freeze on the sale and re-purchase of US-64.
Vital facts were not shared with the Ministry, neither by the board nor
the chairman of UTI."

Curiously, the sequence of events leading up to the imposition of the

freeze in US-64 transactions related by Sinha himself, tells a different
story altogether. On Friday June 29, the then UTI Chairman P S
Subramanyam "informally" spoke to Jaimini Bhagwati, Joint Secretary,
External Commercial Borrowings and Capital Markets, Ministry of
Finance, informing him about the fact that the corpus of US-64 was in
the red.

It is said that Subramanyam told Bhagwati that the UTI's board of

trustees would have to decide on a freeze on the sale and re-purchase of
US-64 instruments at its meeting on Monday July 2 unless the Union
government was willing to infuse fresh funds into the scheme. The
following day, Saturday June 30, a detailed letter to this effect from
Subramanyam was despatched to the seniormost bureaucrat in the
Finance Ministry, Finance Secretary Ajit Kumar.
This letter reportedly reached North Block, the headquarters of the
Finance Ministry, at around 6 pm in the evening. It was subsequently
sent to the Finance Secretary's residence. Copies of the same letter
arrived at the residences of Bhagwati as well as the Chief Economic
Adviser Rakesh Mohan the next day, that is, Sunday July 1.

On Monday July 2, Subramanyam and his colleagues in UTI arrived at

North Block at around 10 am to attend a meeting convened by Finance
Minister Sinha to review the working of Debt Recovery Tribunals. The
meeting was eventually convened by the Minister of State for Finance
Balasaheb Vikhe Patil. After this meeting was over, another meeting of
heads of financial institutions had been scheduled to deliberate on the
Modi Rubber case.

Subramanyam, together with S K Chakraborti, the acting Chairman of

the Industrial Development Bank of India (IDBI) - which is, incidentally,
the single largest shareholder in UTI - did not attend the second meeting.
They were to go to the zonal office of the Life Insurance Corporation (LIC)
to attend the meeting of the board of trustees of the UTI. Before leaving
North Block, at around 11 am, Subramanyam met Sinha.

To use the Finance Minister's language, the former UTI Chairman

"casually" told him about the impending decision on the freeze in US-64
transactions which would be taken by the UTI about an hour and a half
later. At the press conference, Sinha stated: "By then, it was too late. The
Ministry was left with no time to work out alternatives."

He added that if he had ordered the UTI to postpone its board meeting or
delay declaring its financial results (the UTI's financial year ends on June
30), this "would have sent adverse signals to the stock markets and to
investors." The Finance Minister's explanation has failed to convince
many. It can be argued that he created a worse situation by first allowing
the UTI to declare that it would freeze US-64 transactions and then
stating that the government would review this decision after a big hue
and cry was raised.

Sinha may claim he is not passing the buck on to the sacked UTI
Chairman, but is he not doing just that? It now transpires that the UTI
had informed the Finance Ministry as early as May that the net asset
value (NAV) of US-64 had gone below the Rs 10 par value of the unit. Yet,
because of sheer negligence (or, perhaps, ineptitude), these warning
signals were either not communicated to the Finance Minister or he
failed to appreciate the significance of the fact that the country's largest
mutual fund had gone into the red.

Subramanyam was keen on Sinha addressing the July 2 press

conference. But the Finance Minister declined. During the press
conference on Monday after he had announced the six-month freeze on
US-64 transactions, Subramanyam was asked if he was planning to
resign given the poor financial results of the UTI. He said the decision to
freeze transactions in US-64 was a decision of the board of trustees and
that it would not affect the interests of small investors. He also said he
was not planning to quit. He had to eat his words less than two days

Subramanyam had originally planned on returning to Mumbai on

Monday evening itself, but he decided to extend his trip till Tuesday
morning. He tried to meet various senior officials in the Ministry of
Finance that evening, including Rakesh Mohan. His mission had failed.

Subramanyam was back at Mumbai on Tuesday addressing his

employees. That evening, back in the capital, bureaucrats in North Block
burnt the midnight lamp. A Cabinet meeting on Tamil Nadu in which
Sinha was present carried on till the early hours of next morning. At
around 2 am, Subramanyam was rudely summoned from his residence.
He was asked to fax his resignation letter. The UTI office was closed at
that hour but he managed to get the office of the IDBI to let him use their
fax machine. The rest is history.

The Unit Trust of India was set up in 1963 by an act of Parliament as a

statutory corporation. It was constituted as a trust in the sense that the
UTI pays out its entire surplus to its investors or unit-holders after
deducting its expenses from its income. Many of the problems of the UTI
stem from the fact that it is not just a mutual funds organisation. It is
also a development financial institution disbursing term loans to
corporate bodies and also invests in such companies. But more of this a
little later.

During the initial years after the UTI was set up, the financial markets in
the country were hardly developed. To a considerable extent, the UTI
played a crucial role in India's capital markets and financial systems
reaching the kind of maturity these have in recent years. Things came to
such a pass that right through the 1970s and the 1980s, the UTI's
decisions to buy and sell would have an overbearing influence on the
sentiments prevailing in the
stock markets.

Former UTI Chairman Manohar G Pherwani was the first person to

whom the name-tag "big bull" was attached by the media. He was
ignominiously removed in 1992 after the Harshad Mehta scandal broke
out. He suddenly died later that year before the then Joint Parliamentary
Committee could ask him to appear before it as a crucial witness.
Though the UTI currently operates as many as 87 mutual funds
schemes, the biggest such scheme run by the Trust is also the first
mutual funds scheme offered by it, namely, US-64. A mutual fund is a
fund made up of subscriptions obtained from the general public.
Typically, there are two types of mutual funds: open-ended and close-
ended. The latter type of fund matures at the end of a fixed period
whereas an open-ended mutual fund can continue in perpetuity.

There are two broad categories of mutual funds of both types: income
schemes and growth schemes. A mutual fund can also be a mixture of
both income and growth schemes. Simply put, an income scheme aims
at providing an investor a steady return on investments (by way of
dividends) while a growth scheme aims at maximising the value of
investments by parking the funds in high-valued shares which bring
about capital appreciation and also though the issue of bonus shares.

US-64 was the first open-ended mutual funds scheme in the country. It
is open-ended in the sense investors can enter or get out of the scheme
at any point of time on the basis of sale and re-purchase prices which
are announced from time to time. It is this crucial element of the scheme
that got changed when the UTI board decided on July 2 to freeze re-
purchase and sale of US-64 instruments for six months.

US-64 started originally as an income scheme and the bulk of its

investments were in debt instruments. The initial contributors to the
UTI's Rs 5 crore capital base included various financial institutions and
the Reserve Bank of India (RBI) - the latter's stake was subsequently
picked up by the IDBI which became the UTI's single largest shareholder.

During the initial years, the returns obtained by investors from US-64
were linked to the prevailing rates of interest. From the late-1970s, after
companies had to reduce their foreign holdings, the UTI started investing
progressively larger amounts in the equity shares of companies.

Over the years, US-64 became transformed from an income scheme to an

income-cum-growth scheme. In other words, investors not only received
a steady source of income in the form of dividends but also saw an
appreciation in the notional value of their investments. The scheme is
unique in a number of respects: it is the only mutual funds scheme
which can loan funds to corporates and borrow from the RBI though
deals in government securities. At one stage, it was also the only mutual
funds scheme which invested its funds in real estate - the scheme's real
estate holdings are said to be worth around Rs 600 crore.

US-64 stands apart from other mutual funds schemes in one more very
important respect. It does not disclose its net asset value (NAV) which is
a figure that is made publicly available each and every working day. This
has been the single biggest criticism of the scheme over the decades.
Though the UTI is said to be making internal calculations of the NAV of
US-64, there figures have never been officially disclosed. Hence, the
scheme has had an "opaque" form of "administered pricing" of its value.

The UTI had constantly upped the dividend outgo for holders of US-64
from a low of 6.1 per cent in 1965 all the way to 26 per cent in the three
years between 1993 and 1995. It was for the first time in 1996 that the
dividend proportion was reduced to 20 per cent. It remained at that level
till 1998, coming down to 13.5 per cent the next year, going up slightly to
13.75 per cent in July 2000 and then down again to 10 per cent this

The fact is that while the UTI does not assure or guarantee a specific
return, many (or most) investors in US-64 perceive the scheme to be not
only "safe" but also one which has almost assured "steady" returns. The
unwritten perception about the "safety" of the scheme is also an
important why investors react so emotionally whenever an adverse
announcement is made about US-64.

There has been no great uproar about the fact that the NAVs of mutual
funds schemes run by other government-controlled or public sector
bodies like the Life Insurance Corporation, the General Insurance
Corporation and the Infrastructure Leasing & Financial Services (ILFS)
are being quoted way below their par values. For example, the Rs 10
instrument of LIC's Dhan Sambriddhi was worth Rs 1.97 on July 10. On
the same day, the ILFS E-com instrument was being quoted at Rs 2.51
while GIC's Fortune '94 was worth Rs 4.93.

Of the total market for all mutual funds which is right now a little under
Rs 100,000 crore, UTI with its corpus of close to Rs 60,000 crore is by far
the biggest player in the game. Of the 87 mutual funds schemes operated
by the UTI, US-64 remains the biggest scheme accounting for roughly
one-seventh of the total market for all mutual funds. US-64 currently
comprises around one-fifth of UTI's total corpus - this figure used to vary
between two-thirds and three-fourths until as recently as 1997-98.

The first major crisis that took place in US-64 in October 1998 was on
account of the fact that "real" NAV of US-64 had fallen below the face
value of each unit (Rs 10) at a time when its re-purchase price was Rs
14.10 and its sale price was Rs 14.40. It was then reported that the
reserves of US-64 had fallen from a surplus of over Rs 6,000 crore in
June 1995 to a negative balance of Rs 1,000 crore three years later.
The share of equity in the total investments in US-64 had fallen from less
than 40 per cent in June 1994 to over 60 per cent four years later in
June 1998. In fact, the first crisis in US-64 was triggered off after the
then UTI Chairman Subramanyam had told a financial newspaper that
the Trust would be reducing its equity component in US-64 from around
64 per cent to 60 per cent.

This remark, together with a report that the watchdog of the country's
capital markets, the Securities and Exchange Board of India (SEBI), had
wanted to inspect the negative balance of US-64, had set off waves of
panic among investors. Later, the Union government announced a
bailout package which resulted in the transfer of some Rs 3,300 crore to
the UTI from the exchequer.

It was as early as 1992, in the wake of the stock market scandal

involving brokers like Harshad Mehta, Bhupen Dalal and Hiten Dalal,
that SEBI first expressed its desire to inspect the functioning of US-64
and thereafter, make its operations transparent. This was staunchly
resisted by the then UTI Chairman S A Dave on the ground that the UTI
was a "unique" organisation and that it was a statutory body like SEBI.
Thus, it was argued, UTI should not have to comply with SEBI's
directives. This view was tacitly supported by the then Finance Minister
Manmohan Singh and the then Finance Secretary Montek Singh

At that time, the then Chairman of SEBI G V Ramakrishna argued that

exceptions should not be made in the case of US-64 if all other mutual
funds had to necessarily follow certain guidelines and norms. In fact,
Ramakrishna pointed out that since the UTI is the biggest mutual funds
organisation and US-64 is the biggest mutual funds scheme, there was
special obligation on the part of the Trust to set an example to other
(much smaller) mutual funds schemes by following transparent norms
and conventions.

Ramakrishna's views were over-ruled. Still, the Finance Ministry agreed

to set up a committee headed by the former Chairman of the Industrial
Credit and Investment Corporation of India (ICICI) N Vaghul to look into
the issue. In October 1993, the Vaghul committee recommended that the
UTI's term lending operations should be clearly segregated from its
mutual funds operations. The panel further suggested that the entire
mutual funds operations of UTI, including US-64, should be brought
within the regulatory ambit of SEBI with a year or two.

Nothing happened. The Union government did not accept these specific
recommendations of the Vaghul committee. After considerable dilly-
dallying, the UTI mangament itself "voluntarily agreed" to comply with
SEBI's regulations governing the working of mutual funds. But there was
a catch. The UTI agreed to bring under SEBI's purview only those mutual
funds schemes which had been started after July 1994. This clearly
meant that US-64 would continue to function the way it had since 1964
and would not publicly disclose its NAV.

Even as SEBI continued to periodically make attempts to convince the

UTI top management that US-64 should comply with its guidelines, the
Finance Ministry finally changed its stance after the recommendations of
the Deepak Parikh committee (which had been set up in late-1998 after
the first financial crisis hit US-64 in October that year). As a matter of
fact, last year, the former Chief Economic Adviser Shankar Acharya had
urged the UTI to make US-64 NAV based.

However, as is its wont, the UTI took its own sweet time to act. This time
round, its plea was that yet another committee, this time headed by
chartered accountant Y H Malegham, had been instituted in July 2000 to
work out the modalities of the restructuring exercise that had to be
carried out in the UTI so that it would comply with the recommendations
made by the Deepak Parikh committee. This is a classic case of how
government organisations work: one panel is set up to implement what
another panel has recommended .

It is learnt that in July last year, the former UTI Chairman

Subramanyam had told the Malegham committee that he was willing
make US-64 NAV-based from January or February 2002. He also added
that he was hopeful that by then, Parliament would have suitably
amended the UTI Act to allow for the establishment of a separate asset
management company.

Nevertheless, the fact remains that till today, the country's largest
mutual fund, US-64, lacks the transparency that is mandatory for all
other mutual funds schemes.

To return to a point made earlier, over the years, the UTI had become
one of the largest (if not the largest) shareholder in a large number of
prominent, privately-managed corporate bodies. Even as late as three
years ago, it had been estimated that the UTI alone held as much as one-
tenth of all actively traded shares in the country.

Even today, the UTI is a major stakeholder in Indian corporates. For

instance, the holdings of the Trust in percentage terms in selected
companies are: 19.16 per cent in Birla Corporation, 16.66 per cent in
Gujarat State Fertilisers, nearly 15 per cent in ITC, over 13 per cent in
Himachal Futuristic and Hindalco Industries, nearly 13 per cent in DCM
Shriram Industries and almost 12 per cent in Reliance Industries.
While the government always claimed that the UTI was meant to serve
the interest of ordinary investors, the fact is that more often than not the
Trust acted as its "political handmaiden". Every time ministers and
bureaucrats wanted to perk up market sentiments, the UTI was
"informally" told to start picking up specific scrips.

The UTI also helped further the interests of large corporate

conglomerates by undertaking large "private placements". During the
tenure of S A Dave as UTI Chairman, in 1994, the Trust made a
controversial investment of Rs 770 crore in the shares of Reliance
Industries Limited (RIL) at a price which was 10 per cent above the then
prevailing market rates.

The former UTI Chairman Subramanyam often used to talk tough about
selling its holdings in well-known companies to raise funds. But he never
carried out such threats. Perhaps, he was prevailed upon not to hammer
down the prices of prominent shares at a time when the markets were
distinctly bearish.

Though the UTI is supposed to be an autonomous institution managed

by its board of trustees, in actual practice it has been remote-controlled
by North Block, by politicians in power and Finance Ministry
bureaucrats. This is simply because control over the UTI implies control
over massive amounts of money: almost Rs 60,000 crore at present.
While the Trust favours a few promoters of companies with the help of
their influential friends among politicians and bureaucrats, the funds of
the Trust come from an estimated 20 million ordinary citizens.

The working of the UTI is an example of the poor being robbed to pay the
rich. During the months of April and May this year, a small group
comprising large corporate bodies, banks and financial institutions
withdrew the bulk of their US-64 holdings worth over Rs 3,000 crore.
These organisations included companies in the Reliance, Tata, Bajaj,
Bombay Dyeing and Videocon groups, besides institutions like ILFS, the
Infrastructure Development Finance Corporation (IDFC), the Bank of
Baroda and the Bank of India.There are reports that Reliance alone
offloaded units valued at Rs 800 crore in these two months. Thus, these
bigwigs have got away selling their US-64 holdings at well above their
true market values (at prices in excess of Rs 14 for each Rs 10 unit)
while around 20 million small, helpless, middle-class householders and
pensioners are faced not only with the prospect of a freeze on sales but
also would have to bear the brunt of the price of each unit crashing
below its Rs 10 face value.

The Finance Minister has claimed that the government will not bail out
the UTI in the manner it did in 1998 when a sum of around Rs 3,300
crore was infused into the Trust. The question that remains unanswered
is what the government was doing to ensure that the funds belonging to
the people of India were judiciously utilised by the UTI?

Sinha has claimed an "independent" inquiry would be conducted to

determine if there had been "insider" trading. It seems unlikely that such
an inquiry would bear fruit. Leave alone representatives of corporate
bodies, would any UTI official confess that he knew in advance that there
would be a freeze on US-64 transactions? It can even be argued that
members of the board of trustees of UTI too did not know till the
afternoon of July 2 that the board would decide to freeze transactions.
Theoretically, the Finance Minister could have intervened at the eleventh
hour to checkmate such a move.

More importantly, the fact is that right through the month of June there
could not have been any transactions in US-64 as this is the month the
scheme closes for book closure. Thus, if insider trading is to be
established, it has to be proved that someone knew more than one or two
months before the decision to freeze transactions was taken (that is,
during April and May) that the UTI board would, in fact, take such a
decision. This appears improbable.

As for the Finance Minister's other claim that the inquiry would look into
the so-called dubious investment decisions taken by the UTI in the
recent past, an impartial investigation has the potential of revealing
much that could prove to be rather embarrassing for the powers-that-be.
For instance, there are a clutch of media companies which received term
loans from the UTI. All these companies are headed by journalists who
are favourably inclined towards the ruling dispensation.

Far more scandalous is the case of a Lucknow-based concern called

Cyberspace Infosys. The UTI invested a sum of around Rs 34 crore in
this company despite advice to the contrary from its own research team
and despite the fact that its own associate company, UTI Securities, has
opted out of managing the company's public offering of shares. The
promoters of this company are currently embroiled in various law-suits
with its investors who have alleged that the promoters had absconded
with their funds.

And guess the name of the person who was featured in this dubious
company's publicity material for having inaugurated its function? He is
none other than India's Prime Minister Atal Behari Vajpayee.
The Financial Express, November 29, 2001

The unsinkable Unit Trust of India (UTI) turned out to be a sinking

Titanic when its flagship scheme US-64 was frozen last July facing
massive redemptions. UTI is the government-run asset manager enjoying
seventy per cent share of the Indian mutual fund market managing Rs
575b for some 41m investor accounts in 87 schemes and US-64 is its
largest scheme accounting for a quarter of UTI assets. Floated in 1964,
the US?64 generated unsurpassed dividends for investors every year,
which in turn made it an assured income scheme, backed by the
government. But behind the veil, a lot of malpractices were nurtured.
The Indian Congress alleged Prime Minster Atal Bihari Vajpayee and
Finance Minister Yashwant Sinha to be partners in UTI scam. The UTI
chairman P S Subramanyam had to resign and is now facing a lawsuit.

US-64 had long been endowed with the characteristics of an income

fund. It was perceived as a saving vehicle for retail investors. The
Scheme provided a consistent flow of dividend and did not lower its
repurchase price when its net asset value (NAV) dropped. Early this year,
NAV of the Scheme plunged below the par of Rs 10, whereas the
repurchase price was quoted above Rs 14. Informed Institutional
investors decided that to be the time to pull out en masse that forced UTI
to freeze the Scheme on July 2.

(What is the NAV of the ICB managed Mutual Funds in Bangladesh, does
any body, even the SEC, have any idea ? Unfortunately it is a big and
empathic NO !! Do we have any lesson to learn from here ?)

What went wrong with UTI and what best could have been done? If we
look back, we find that the seed of evil was planted when the manager
changed its asset allocation and shifted its weight towards equities in
mid?1990s. Later it joined the tech-boom and was late to quit before its
bust. Now the Scheme has 70 per cent of its assets in equity and it could
not finance the repurchases being unable to sell-off its equity stakes in
the bear market. Being an income scheme in nature, it should not have
shifted its allocation for speculative equities.

The Scheme arbitrarily quoted repurchase price keeping volatility at the

minimum. However, it could have used hedging techniques to safeguard
its returns. (Hedging is anathema to our SEC pundits in Bangladesh,
changes in the new Mutual Fund Rules testifies so. Go to hell but do not
hedge, as they have to jack up the index any way !!!)

UTI has been largely politicized. Finance Ministry substantially

influenced the operations of the Fund and often tried to boost the market
artificially to salvage its macroeconomic miscalculations. The
government also wanted to keep the small 20m retail investors happy
considering them to be an important political constituency.

(Now if we just gloss over the new SEC Mutual Fund Rules 2001 of
Bangladesh what do we see ? The pundits sitting at SEC here who
essentially have no operational or even academic experience or
knowledge have now made it mandatory and compulsory for mutual
funds to invest 75% of their money in the riskiest 'secondary' market at
all times. The Rules is a 'wish list' which essentially serves not as a
'regulatory guideline' but a pathetic 'operating manual' !!! Is it not
regulatory interference ? Do we have something to learn here too ?.)

Regulatory obstacles also let UTI go uncontrolled. This Scheme was

created in 1964 by an act of parliament and thus was beyond the
policing power of the SEBI. As such, the Scheme did not have to publish
its NAV as others had to. (Ahh ha et la Bangladesh, ICB gives a damn to
SEC and vice versa, prophets of ICB do not burn under the fire of SEC
rules, only the bums do).

Inter Scheme Transfer was another mechanism to support failing

schemes violating the interest of a particular scheme holder.

There was no Chinese Wall among the fund managers. Management

decisions started at the desks of the fund managers and ended with their
bosses. The top authority made their will work and that often was
against the needs of the schemes. (Sounds familiar ? What is the
practice at our ICB ? Has SEC ever cared to find out ?)

Various unethical practices were also rampant. The Central Bureau of

Investigation has filed a case alleging that the founder of Cyberspace Ltd
had paid Rs 5m to UTI officials to ensure that UTI invests in his
company, leading to Rs 320.8m scam. (Parimal was a very popular name
at Dhaka in the boom days of 1996, where he used to serve ? Do we
remember ?)

In light of this scenario, we can find that our government-run ICB

mutual funds are also vulnerable to such exploits, so is BSRS mutual
funds. Both of them do not comply SEC mutual fund rules. These funds
are not looked after by either SEC or a Trustee and Custodian. Single
corporate body is performing the functions of four separate legal entities
like asset manager, trustee, custodian and sponsor. Notably they do not
publish their net asset value (NAV) ever, where rules demand monthly
publication. Worryingly, the repurchase price of ICB Units are set
arbitrarily without tagging to net asset value and not recalculated even
once in a month.

What lessons can be fathomed ? These funds first should be

restructured and then their operating methods are debugged before they
sink deep. Portfolio management procedures should be reshaped. Every
single fund should have separate manager(s) having supreme authority
and guided by the fund management objectives and policies stipulated in
the prospectus. They should be aided by research department. The
Chinese Wall should be built among fund managers to avoid inter
scheme transfers and they should be held liable for performance.

The all equity feature of all the funds are also worrisome. This structure
does not have any cushion against market plunge and would face the
fate similar to UTI if trapped in a selling wave. ICB should also think of
designing upcoming funds within the broad category of growth, income,
balanced or index fund.

Will our responsible authorities start thinking before it is too late.

Government bailout is an option open to them, but is that desirable?
Who will 'bell' the government.

UTI - A Saga of Crises and Bailouts

The very name of UTI smacked of safety and handsome returns for the
multitude of Indian investors for over three decades. The organization
flourished under the erstwhile closed-regime in the absence of
competition. The US-64 crisis for the first time exposed the troubled
situation at UTI as a result of the competitive forces unleashed by the
deregulation of Indian financial markets. The dismal state of affairs at
UTI is a result of a number of factors. It is a classic case of a state-owned
organization perturbed by concomitant political interference, corruption,
lack of accountability and transparency, et al. The impractical and
populist financial measures perpetuated by the erstwhile socialist era
have added fuel to the fire.

The Genesis of Crises

The first section `Genesis of Crises' concentrates on the causes for the
first major crisis at UTI in the year 1998. In order to comprehend the
causes better, it provides an understanding of the functioning of US-64,
the flagship scheme of UTI and the largest mutual fund scheme in India.
The adherence to unsustainable practices such as arbitrary fixing of the
sales and repurchase prices, non-disclosure of the Net Asset Value (NAV)
etc. have led to the negative reserves and crises at UTI as elucidated in
the article `Basics of US-64'. The second major reason is that of
unsustainable levels of dividend pay outs, which UTI tried to uphold in
spite of the fact that the performance of the scheme did not support
them in the first place. UTI had been one of the most promising dividend
payers in the mutual fund industry. At one point of time it paid a
dividend of about 20 percent for four years in a row as observed by the
author of the article `US-64 : How did Dividends Contribute'.
UTI has a portfolio of more than 80 schemes in operation. The sheer
number of schemes makes it possible for UTI to operate inter-scheme
transfers and transactions, which are unhealthy governance practices at
their best. This tantamount to trading between the schemes inter se
rather than in the market place as discussed in the article `Other Affairs
at UTI'.

All these factors were contributing their bit to the impending downfall of
UTI and brought its reserves into the red in October, 1998. This was for
the first time in its thirty-year odd history that UTI found itself amidst
trouble and so deep into it that it had to come public with it and seek the
support of the government to bail it out from the crisis. The crisis put its
very credibility in question. The article `Credibility in Question', rightly
points out that UTI is on the verge of losing its credibility in the eyes of
the myriad investors who have parked their funds with it. The
government is left with little choice but to step in and prop up its ailing
prodigy since letting down UTI would be too much of a shock for most of
the investors, whose main criteria in investing in UTI was the fact that it
was state-run. But that would be far from a fitting end to the crisis and
the possibility of recurrence of such crisis in future. The article further
analyzes the various options that were open for the government to bring
UTI back into proper shape.

The age of reforms brought about an increased activity in the equity

markets of the country. During this era too, UTI stepped in to prop up
the equity markets as and when required, at the behest of the
government ignoring the economic rationale. This coupled with the lack
of transparency and accountability has also been a major reason for the
plight of UTI during the 1998 crisis as the article `UTI: A Need for
Transparency' brings out.
Half-hearted Remedies The second section of the book, `Half-hearted
Remedies' focuses on the aftermath of the first crisis and UTI's efforts
towards implementing the recommendations of the high powered
committee. The crisis of 1998 brought into light major weaknesses in its
operations and various loopholes in its management that needed to be
rectified. The government came up with a bailout package in the form of
Special Unit Scheme (SUS - 99) pumping in a huge amount of Rs. 3300
Crore into UTI. But in order to avert recurrence of such crisis, a high
level committee under the chairmanship of Mr. Deepak Parekh was set
up to look into the mess and suggest remedies. The Committee came up
with a set of 21 recommendations. The recommendations included
reducing dividend pay- outs, maintaining a proper ratio of debt and
equity in its investments, shifting US-64 into an NAV-driven price
mechanism besides bringing it under the purview of SEBI. Most of these
recommendations had to be implemented within a specified time frame
and UTI for its part did try to implement some of these measures as the
article, `Setting Things Right?' brings out.

In the years that ensued, attempts were made to put a new lease of life
into the ailing giant. One such proposal was to divide UTI into smaller,
manageable units. This proposal remained on paper. The article `Losing
the Race' explains the plight of UTI in the face of competition. By early
2000, UTI was fast losing its market share in the Indian mutual fund
industry to the upcoming private mutual funds. Its market share
dropped from a virtual monopoly to around 60 percent levels. This was a
clear indication that UTI was losing its charm with the investor
community. The proposal to corporatize UTI too did not go beyond the
paper work and thus things at UTI were not far away from the way they
were prior to the 1998 crisis.

This time again there were plenty of warning signals that cautioned
about a major danger lurking in the corners for UTI and its 20 million
investors. The downfall in the equity markets and the ensuing bloodbath
in the information technology, communication and entertainment (ICE)
stocks hinted that UTI, which had taken positions in this segment at the
very peek of the euphoria would land in trouble. UTI had bought some of
the ICE stocks at sky-rocketing prices and the prices of these scrips were
constantly battered down soon after, thus eroding a lot of value from
these investments. Further the companies that UTI chose to invest in too
were questionable. All these issues and ample examples of UTI's
miscalculated decisions form the focus of the article `The Rot in UTI',
which was published much before the crisis came to light.

During the boom period of Indian equity markets during 1999 and 2000
UTI had ample opportunities to shift its US-64 scheme to an NAV based
price mechanism. The NAV of the scheme was higher than the
administered price at certain points during this period offering it a very
good opportunity to bring about the much-needed change. But UTI chose
to squander this opportunity. As a result of these short fallings UTI is
forced to shift US-64 to an NAV based mode and to an NAV that is less
than the face value of the US-64 units to the dismay of scores of its
investors. Further UTI did not maintain the desired proportion of debt in
the portfolio of US-64, which could have acted as a cushion during the
downfall in the equity markets. All this adds up to the mismanagement
of the scheme and was bound to bring about havoc at UTI. The article
`Missed Chances and Inexplicable Decisions' sheds light on these issues.

The next article, `Why UTI is Pushed to a Corner?' analyses how the UTI,
in spite of being the pioneer in the Indian mutual fund industry has been
far from being the forerunner of best practices. There are too many
clumsy issues that surround its modus operandi. The nexus between
politicians and corporate chieftains has led to brutal sacrifice of
investors' interests at the altar of other considerations. The sheer clout of
UTI made it a juggernaut whose moves would have enormous impact on
the market as well as the corporates in whose securities it invests. Any
offload by UTI of a company's stock was enough to scare the promoters of
dilution of their stake in the company. This had acted as a major issue
that propelled politicians to restrict UTI from doing so. The author opines
that the best solution to ensure independence is to privatize UTI.

Recurrence of Crisis The third section of the book, `Recurrence of

Crisis' deals with the second and the recent crisis that had rocked UTI in
July 2001, for the second time in less than three years. The trust on Unit
Trust of India built over a long period is fast eroding in recent months.
The UTI had been shouting from its rooftop that everything was fine till it
was too late. The fact that situation was bad enough for UTI to freeze the
repurchase and sale of its US-64 units for the first time ever in its 37
years history, was never even hinted to the retail investors. On the other
hand, corporates either because of their ability to anticipate the state of
affairs at UTI or because they had been tipped off, withdrew most of their
funds well before the crisis actually struck. This led to further allegations
of insider trading in the US- 64 scheme on top of the various complaints
that already plague its operations as explained in the article `Where
Trust's Gone' .

The attitude of the government in handling UTI's crisis has not been very
appreciable either. There seems a lack of clarity in the policies of the
Government as to its interference in the affairs of mutual fund, in the
market-driven economy. The reluctance of the Government to let UTI
operate like any other mutual fund is not in tune with the market
reforms that successive Governments have been talking about. Moreover,
repeated bailouts by the government instead of leaving UTI to the market
forces, incentivise UTI to continue with its complacent attitude and the
investors to expect unrealistic returns and sovereign guarantee. The
article title `Crushed by Mistrust' provides insights into these issues.
The decision of freezing the sale and repurchase of US-64 units is bound
to have a long lasting impact on investors, markets and other mutual
funds too. The psychological impact of UTI's move would wipe out
investor's trust in the mutual fund industry as a whole. During the days
following the announcement of the freeze many mutual funds witnessed
heavy outflow of funds from their schemes. The author of the article,
`The Trust Busters', brings out these issues clearly besides questioning
the laxity of UTI. The decision to freeze comes as a severe blow to the
investors irrespective of the fact that UTI wants to underplay the
magnitude of such a drastic move. The author of the article `A Breach of
Trust' strongly opines that UTI had squandered the three years time after
the first crisis and has failed in preventing the second crisis.

The Road Ahead The fourth and final section of the book is `The Road
Ahead', which is a collection of articles that focus on the importance of
leaving UTI to the market forces. The articles are reactionary in nature
with authors commenting on the various issues and the possible
remedies that can be considered to get UTI back into shape. In a
significant departure from its customary pace, the government acted
rather quickly and forced UTI to come up with a remedial package as
early as fifteen days after the announcement. The chairman of UTI, P S
Subramanyam was unceremoniously sent off from his position. UTI soon
came out with a relief package, which is cleverly structured to reduce
redemption pressures. In addition the relief package relaxes the freeze
only for the 3000 units for each investor. The article `Regaining Trust?'
takes a critical view of the relief package as well as the necessity of
leaving UTI's survival to the forces of the market. The article strongly
argues that government should stop propping up UTI and would be well
advised to leave it to the forces of the markets.

In `Disown UTI' the author strongly recommends that rather than

investor abandoning UTI, the government should disown UTI, leaving it
to survive or perish on its own strengths and weaknesses. Rescuing it,
every time it is in trouble, would only mean throwing good money after
bad. The political class chose to ignore the discussion on UTI each time
the parliament was in session. As the author rightly points out in the
article `UTI Scandal: Behind the Scenes', each political party was busy in
hiding its own misdeeds and did not dare to raise the accusing finger at
the other.

After the announcement of the relief package UTI went ahead with a
publicity program intended to boost the confidence of investors but sadly
the facts that were omitted in the campaign were the most useful ones.
The article, ` US-64: Facts UTI won't Tell You' is a satirical comment on
the facts that are relevant for the investors but those that UTI would not
bother to disclose at all. Towards the end of the book the comments of
Prof. S B Mathur, IIM Lucknow, provide valuable insights into the whole
UTI fiasco and a probable way out.

The two major crises that have rocked the investors, drive home the
point that UTI should be left to the market forces rather than being
propped up by the government every time it goes under at an enormous
cost to the exchequer. The remedy to the problems of UTI is not full
protection but competition that would force it to mend its ways to