The Hindu : A package for the oldest mutual fund

Online edition of India's National Newspaper
Tuesday, Sep 03, 2002

Opinion

Opinion - Editorials

A package for the oldest mutual fund

THE PACKAGE FOR the UTI announced on Saturday aims to come to grips with its problems in their entirety. Piecemeal approaches of the type attempted in the recent past were counter productive. In July last year, the Trust suspended the US 64 scheme amidst a blaze of negative publicity dragging its problems to centre stage. Official policy since then has overwhelmingly concentrated on fixing the scheme but in stages. A limited guaranteed repurchase facility for old unit holders was announced in December last. While it has clearly been successful in maintaining a semblance of investor confidence, thereby ensuring that there was no devastating run on UTI, the drawbacks of that approach have become apparent. It merely postponed the stupendous task of meeting the huge liquidity requirements of US 64 to May 2003, when the administered repurchase scheme was due to end. The Government has been supporting the UTI in instalments — this fiscal year alone Rs. 1,000 crores has been earmarked — in order to ease the redemption pressures.

However, it was clear to everyone that all the UTI's problems needed to be tackled at one go. Along with the US 64, the country's oldest mutual fund scheme, UTI's management of several regular return schemes has been called into question. Many of them promised a fixed return on a monthly basis and had become immensely popular among pensioners and various other vulnerable sections of society. The Trust has not been able to meet its commitments once again. The clamour for the Government to step in has been getting shriller by the day.

The Government's package comes not a day too soon and is noteworthy as it attempts to tackle both short-term and long-term issues that have bedevilled the UTI. Meeting the US 64's redemption pressures, which were likely to get accentuated over the next few months, and ensuring that the guaranteed return is paid on the monthly income schemes have been the most pressing of the near term issues. The Finance Minister's categorical assurance in both is welcome. Long time investors of the US 64 have been assured of a floor price well beyond May next year. That plus the moves to confer tax concessions on unit holdings should help regain investor confidence at least partially. Regular return schemes, the other problem area, are to be restructured wherever possible, in line with the lower interest rate regime but where that is not possible the Government will ensure that the Trust honours all its commitments.

The two key aspects of the UTI package are, one, the unambiguous support to the troubled fund from its owner and, two, the attempts to minimise the cost of such support. Splitting UTI into two separate entities — UTI-I and UTI-II — is a well thought out move to insulate the better performing schemes from the vagaries of the troubled ones. While UTI-I will be administered tightly by the Government, UTI-II which takes over most of the other schemes which — both operationally and in performance — match some of the better performing private sector schemes will come under professional management. The package can help UTI regain not only investor confidence but also some gloss, no mean achievement considering its recent traumatic experience. In the process of executing these measures the Government hopes that the stock markets, whose positive response to the package is critical, will rise and thereby reduce the cost of its commitments, now estimated at around Rs. 14,500 crores. The Government also hopes to address not only UTI's problems but the concerns of the investing community and the capital market at large. Few will question its relevance or its timing in these troubled times.

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