New Delhi, Oct. 28: The Cabinet today repealed the UTI Act, 1963 through an Ordinance to implement an earlier decision to split the mutual fund giant into two separate companies.
UTI-I will run the popular, but loss-making, US-64, all assured return schemes, the special unit scheme 1999 and the development reserve fund and stay in government hands; UTI-II will look after the clutch of profit-making schemes that do not provide any assured returns.
UTI-I, which will comprise schemes worth about Rs 25,000 crore, will be managed by a government-appointed administrator assisted by a team of advisors.
While some of the assured-return schemes will be shut down, interest and dividend pay-outs for all other assured return schemes will be “reset” at lower rates. No new schemes will be launched by this state-supported mutual fund. UTI-I employees working on these schemes will be re-employed at terms to be mutually worked out between the Centre and them.
UTI-II will be run “professionally” by four financial institutions and banks and eventually privatised. Sources said Life Insurance Corporation and State Bank of India may be involved. Finance secretary S. Narayan said UTI-II will have an initial corpus of Rs 10 crore with equal contribution from all new promoters. Ultimately, it will be sold “to enable government to part with mutual funds business.”
While profits earned during the interim period will go to the new promoters, earnings by way of sale of this mutual fund will accrue to the Centre. In a sense, the sale proceeds of UTI-II will go towards balancing the huge hit the Centre is expected to take by way of meeting its commitments towards funding returns on US-64 and other assured schemes.
The finance ministry has, in fact, committed itself to liabilities of over Rs 14,600 crore to meet possible liabilities from these assured return schemes. Narain clarified that the facility of redemption of US-64 at the committed prices would continue beyond May 2003.
The government is also mulling issuing interest-bearing tax-free certificates in place of units to investors who neither wish to hold on nor exit totally from the scheme, post May 2003. The government may offer a nominal interest of 6-7 per cent on this, which will be tax free, implying an effective rate of return of about 9-10 per cent.
Leading chambers welcomed the government’s decision to bring in an Ordinance for amending the UTI Act, describing it as a series of reforms to strengthen the financial sector and bourses.
“We have argued that the UTI Act needs an overhaul, especially after the crisis in its monthly income plans and assured income schemes,” CII said. Ficci said the Ordinance would give UTI a professional shape by splitting it into two funds.