The Hindu : For investors' benefit

Online edition of India's National Newspaper
Wednesday, Oct 30, 2002

Opinion

Opinion - Editorials

For investors' benefit

WITH THE CABINET approving an ordinance to repeal the UTI Act, the difficult task of revamping the country's oldest and still by far the biggest mutual fund has begun. The Cabinet's decision was only a reiteration of the Government's commitment to the unit holders in August. The decision to split the Trust into UTI-I and UTI-II, which is at the very core of the restructuring exercise, was announced then. The new Ordinance, which is expected to be promulgated soon, will, apart from giving it statutory powers, spell out the finer details of the revamp exercise. While much would depend upon the action taken after the repeal of the Act, the broad contours of the UTI package are impressive and ought to go a long way in finding a solution to the vexed issue of the flagship scheme US 64 and many regular return schemes. In essence, the Government is underwriting these schemes, assuring investors that it will stand by the Trust's original commitments on redemption and return. That task will obviously be facilitated by the organisational changes proposed. The Government will virtually take over UTI-I to which, apart from US 64, all regular income schemes (the Monthly Income Plans, MIPs), the Special Unit Scheme (SUS99) and the Development Reserve Fund will be transferred. A Government appointed administrator will manage UTI-I which will confine itself to managing the existing schemes and not start new ones. As part of the restructuring, however, it can reset interest rates on some schemes to bring them in line with market conditions and foreclose others with a long maturity.

If the above can be called the defensive part of the UTI package — the Government is certainly reacting to a longstanding malaise — what follows next with regard to UTI-II ought to present the Trust as a whole in a much better light. All the existing net asset value (NAV) based schemes will be transferred to UTI-II which will be constituted as an asset management company identical to those operated by later entrants to the Indian mutual fund business. Interestingly, a few public sector banks and institutions and not the Government will be its sponsors. The capital market regulator, SEBI, will have complete jurisdiction over it. Some important advantages can accrue to the Government as well as the investing community through this arrangement. The UTI's track record in managing many of its NAV-based schemes has been better than what is perceived. No doubt the repeated crises over US 64 and subsequently over the MIPs have created a negative image for the Trust as a whole, including its better performing schemes. Whether the new managerial and organisational dispensation proposed for UTI-II helps immediately in unlocking the value of many of its NAV-based schemes, thereby restoring some of the lost lustre, remains to be seen. However, there is no alternative but to insulate the normal fund business from the extravagant commitments given in the past. Hopefully, freed from political interference and with the promised professional management, UTI-II should reap rich dividends to the Government, when its planned divestment takes place.

Ultimately, it is the investing community at large and not just unit holders who should be the main beneficiaries of the UTI restructuring. For, the recurrent crises over US 64 have been a principal factor leading to a serious and widespread loss of confidence all around. By attempting to tackle it forcefully, the Government hopes to send out a salutary message. Coincidentally, on Monday, the Cabinet approved another ordinance that will confer greater powers on SEBI, including those to search and seize. Ineffective capital market regulation has been cited as another contributing factor to the unsatisfactory state of the market. Like the restructured UTI, SEBI with its enhanced status will have to prove that it can use its powers for the common benefit of the investors.

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