The Telegraph
Since 1st March, 1999
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The packages for the Industrial Finance Corporation of India and the Industrial Development Bank of India will also follow. At the moment, the government has announced a Rs 14,561 crore bailout package for the Unit Trust of India. More important than the bailout is the proposed restructuring plan, also involving a repeal of the UTI Act. The UTI will be split into UTI-I and UTI-II. The second will be a pure mutual fund with net asset value based schemes and will eventually be privatized. These schemes will thus have no guarantees, either on principal or returns, and will manage a portfolio of Rs 17,784 crore, 42 per cent of the UTIís present portfolio. There can be no objection to UTI-II, except that no deadline has been set for privatization. Problems are with the so-called sick box, rather than the healthy box. The sick box of US-64 and assured return schemes will be with UTI-I and will be managed by government-appointed administrators and advisers, which does not suggest professional management. The Rs 14,561 crore bailout has a breakup of Rs 6,000 crore for US-64 and Rs 8,561 crore for ARS. That the UTI would be bailed out was known since December 2001. To discourage redemptions from US-64, there will also be tax concessions like exemptions from dividend tax and capital gains tax, to be announced in the next budget.

US-64 investors already had a fairly attractive redemption option till May 2003. This has now become open-ended, extending beyond May 2003. Thus, UTI-I will remain until the last investor decides to exit or transfer to UTI-II. Guaranteed super-normal and assured returns will end from June 2003. Other than US-64, there are 21 ARS. In each of these, the UTI has promised returns of between 13 and 14 per cent, with actual returns between 7.5 per cent and 8.5 per cent. If one ignores non-resident Indians, overseas corporate bodies, foreign institutional investors and corporate organizations, the UTI has 24 million individual investors. This middle class does not represent Indiaís poor and the bailout is for this class. While it is partly true that the government has a moral obligation because it is responsible for the UTI mess, Rs 14,561 crore represent a regressive transfer. Taxpayerís money will be used to pay and this does not mean direct taxes, not paid by the poor. The poor pay indirect taxes and inflation taxes, not to speak of alternative opportunity costs of investments in physical or social infrastructure. In the not-too-distant past, bailouts to the UTI were refused precisely on these grounds, a fact acknowledged by the UTI chairman. Clearly, the government now has state elections in 2003 in mind and May 2003 is not that far away from Central elections either. This is part of Mr Jaswant Singhís overall strategy of winning back the middle class. The poor donít matter.

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