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Govt slices UTI, bears burden

New Delhi, Aug 31: Unit Trust of India, the country’s largest mutual fund which manages an ever-shrinking corpus of a little over Rs 42,000 crore, is being carved up.

The government today announced a Rs 14,561-crore bailout plan for UTI’s flagship scheme US-64 and the fund’s assured income schemes, and set a tentative roadmap for a process of privatisation.

The Cabinet Committee on Economic Affairs (CCEA) cleared a proposal to split the fund into two companies: the first — to be called UTI I — will comprise US-64 and the roughly 25 assured return schemes (mostly monthly income plans) where the fund has been badly battered because it has been unable to fork out the 14-16 per cent promised return. Most of the assured return schemes are due to be wound between 2003 and 2005.

The second — UTI II — will comprise all net asset value-based schemes other than US-64 that include Mastershare, Mastergain, six sectoral funds, UTI bond fund, the G-sec Fund and the Childrens’ Growth Fund.

The government has decided that it will assume all the liabilities of UTI-I — currently running at Rs 14,561 crore — which will be managed by a government-appointed administrator and a team of advisors nominated by the government.

The liability is estimated at about Rs 6,000 crore for the US-64 scheme. The shortfall in the assured return schemes is put at Rs 8,561 crore.

Finance minister Jaswant Singh said the package was meant to protect the pensioners and other small investors besides running the net asset value-based schemes of the fund on professional lines.

Singh told reporters after the CCEA meeting that a package for the Industrial Finance Corporation of India and the Industrial Development Bank of India would also be announced soon.

The finance minister said an Ordinance to repeal the UTI Act would be issued. “The objective will also be to create a market and reduce redemption pressures,” he said.

The government’s plan to restructure the beleaguered UTI virtually rubbished the recommendations of the three committees headed by Deepak Parekh, S.S. Tarapore and Y.H. Malegam — all of whom favoured a three-tiered structure that would break the close nexus between the government and UTI.

The government’s assumption of direct control of US-64 — which was always implicit and only denied when the problems surfaced — has, however, drawn praise from both the UTI big-wigs and industry at large.

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

US-64 tax breaks

The government will also consider certain tax concessions on US-64 with a view to providing an incentive to unit holders to remain in the scheme, Singh said. The tax concessions could be on the dividends and capital gains.

The government is now making US-64 open-ended so that it is not necessary for unit holders to redeem all the units in May 2003 when it will fetch Rs 12 per unit up to 5000 units and Rs 10 per unit beyond 5,000 units under the administered price repurchase scheme that was launched in August 2001.

The investors will be able to continue to hold the units beyond May 2003 if they so desire and the government will honour the commitment of Rs 12 per unit up to 5,000 units and Rs 10 per unit beyond 5,000 units whenever they come for redemption.

At the same time, the interest on the assured return schemes will be reset lower wherever there is an opportunity to do so.

UTI-II will for the time being be managed by a professional chairman and a board of trustees. Eventually, it will be divested.

The government's decision is designed to send a message of reassurance to the 20 million investors in the mutual fund who were stunned in July 2001 when UTI decided to suspend sales and repurchase in US-64 for six months after it found itself in a deep financial mess brought on by a stock market crash in February that year.

The cash outgo as a result of the US-64 redemption will be around Rs 1,000 crore for which money has been apportioned.

Finance secretary S Narayan said the remaining Rs 5,018 crore liability, which government would have to bear, will be due from next year onwards. This would be met through an issue of bonds, much like the way the government tackled the rising oil pool deficit in the past.

The value of UTI's assets as on June 30 stood at Rs 42,000 crore, of which Rs 17,784 crore was the market value of the assets in NAV-based schemes and remaining Rs 24,215 crore was on account of US-64 and assured return schemes, Narayan said

The Rs 17,784 crore NAV-based assets will be tranferred to UTI-II which will be a “working and healthy” mutual fund managed by a professional who will be appointed from outside at a market salary, said Narayan.

The remaining Rs 24,215 crore will be with UTI-I which will continue to exist till the last investor in US-64 fixed return and other assured return schemes exits from them.

Narayan said the US-64 fixed return scheme will remain frozen and the investors will be allowed to sell back to UTI at the assured rate.

The NAV-based US-64 scheme will continue and be transferred to UTI-II, he said.

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