UTI: Set for drastic overhaul

S. Vaidya Nathan

THE Corporate Re-Positioning Committee for the Unit Trust of India (UTI) has made far-reaching recommendations. The salient ones are as follows:

The UTI should re-position itself as a mutual fund. It should have an asset management company (AMC) and function under SEBI (Mutual Funds) regulations.

The flagship fund US-64 must be linked to the NAV.

A provision must be made for the difference between the guaranteed repurchase price under the Special Liquidity Package and the underlying asset value. This is applicable for repurchase of unitholdings of up to 3,000 units,

The UTI Act 1963 should be cast out of the law books and replaced by another legislation. The committee's view is that if the UTI Act is only amended and not repealed, the government may be left with residual responsibilities. This could lead to a continued public perception of continued accountability of the government for the UTI's actions.

The government must ensure that it is totally distanced from the UTI.

Transaction costs to give effect to the changes should be minimised or eliminated as the assets are vested with AMC. To this end, the assets must vest with the AMC at the lowest possible cost.

The sponsor company must have an equity base of Rs 550 crore and the AMC should have an equity base of Rs 1,000 crore.

The companies that hold the initial capital of Rs 5 crore of the UTI and which infused Rs 445.5 crore in 1999 according to the Deepak Parekh Committee recommendations must hold 40 per cent of the sponsoring company's equity. Their holdings of US-64 must be converted into shares of the sponsoring company. Such companies include IDBI.

The other 60 per cent of equity must be offered to a strategic partner. The partner must be a recognised player in the market and have a reputation and competence that would be the required degree of confidence to UTI investors.

No single institution must hold more than 25 per cent of the equity of the sponsoring company.

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The Development Reserve Fund of the UTI should be transferred to the AMC free of cost.

An independent valuer must be appointed to value the UTI and determine the goodwill attached to it. It should also determine the contingent liabilities out of the assured return schemes and determine the net liability after considering the DRF.

A provision must be made for the contingent liabilities due to the gap between the present value of future liability of assured return schemes and the value of their assets. To cut the gap, the UTI must recast the portfolios of these schemes at the earliest. It should move to ensure that the portfolio has only government securities and debt instruments. Equity exposures must be liquidated. The UTI's MIPs allow for a 15 per cent exposure to equities.

Alliance record date: October 31 was the record date for an interim dividend under the Quarterly Dividend Plan of Alliance Monthly Income Plan (not an assured return scheme). Investors were to communicate change of address or bank details to CAMS Investor Service Centres before October 31.

K-Gilt record date: October 29 was the record date for dividend under the Dividend Option of the Savings Plan of K-Gilt.

Morgan Stanley views: Morgan Stanley has in its latest quarterly communication expressed the following views on the market: Capital protection has been the winning theme in the last year, and the events of the third quarter have strengthened this view as the global bear market gets protracted. The fund has said it has assigned a high weightage to management quality and sector dynamics as bear markets involve flight to quality.

The fund has stated that it has remained underweight on sectors dependent on the global growth, such as IT and commodities. It has been overweight on the financial sector as it has held the view that this sector is poised to grow. The fund has stated that its top holding remains Hero Honda as it is difficult to find other companies offering earnings growth of more than 40 per cent, expanding margins and consistently increasing market share.

The fund feels that just as there was too much optimism in 2000, now there are ``signs that equities may be reaching a point of excessive pessimism... Equity markets typically begin to rally well before the economic and earnings cycle turns. Accordingly we are prepared to look at opportunities with this historical perspective in mind.''

The funds top five holdings are Hero Honda, HDFC, HDFC Bank, Infosys and SBI. It had net assets of Rs 617.67 crore and capital of Rs 658.59 crore as of September 30.

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Morgan Stanley update: There has been a notable shift in the top holdings of Morgan Stanley Growth Fund. The top ten holdings now are Hero Honda, HDFC, Infosys Technologies, State Bank of India, Container Corp, HDFC Bank, Cipla, MTNL, ITC and Gujarat Ambuja Cements. The top ten holdings have a more diversified look than at any time in the past.

The fund has cash/cash equivalents of around 9 per cent. The net assets of the fund as of September 30 was Rs 652.22 crore. The value of non-performing assets is 0.17 per cent of net assets and illiquid stocks 1.28 per cent of net assets. The fund has no exposure in derivatives and investments in ADR/GDR of Rs 26.01 crore.

PruICICI short-term plan: Prudential ICICI Mutual Fund has launched a short-term plan under its Income Plan. The scheme was open for subscription in the initial offer period on October 18 and 19. The fund would invest in debt securities for the medium term with maturity of between three to six months with lower level of volatility. The plan is intended to offer investors a basket of debt products of various tenures.

US-64 prices: The repurchase price for unitholdings of up to 3000 units will be Rs 10.20 per unit in October 2001 under the Special Liquidity Package, This is a rise of 10 paise over the October levels. The package was offered from August at Rs 10 per unit and is due to end in May 2003 at Rs 12 per unit. For holdings beyond 3,000 units, a repurchase facility at NAV-linked prices will be available from January 2.