The Hindu : Govt. announces bailout package for UTI

Online edition of India's National Newspaper
Sunday, Sep 01, 2002

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Govt. announces bailout package for UTI

By Alok Mukherjee

NEW DELHI AUG. 31. The Central Government today announced a major restructuring of the Unit Trust of India (UTI) by splitting the company into two and directly taking responsibility of the US-64 and all assured return schemes. It also decided that redemptions of the US-64 scheme would continue beyond May 2003 with units up to 5,000 getting a guaranteed redemption price of Rs. 12 a unit and those beyond 5,000 at Rs. 10 a unit.

In order to induce people to continue to hold US-64 units beyond the earlier set deadline of May 2003, the Government has decided to offer tax sops, details of which would be announced later. But the tax concessions would be either on dividend income or capital gains.

As for the assured return schemes, including the Monthly Income Plans (MIPs), while the Government will guarantee the schemes, it has retained the right to revise the interest rates downward and to go in for foreclosure of some of the schemes. "We will go into it scheme by scheme.

The UTI had earlier reduced the interest rates and foreclosed some schemes and this has been upheld by the courts," the Union Finance Secretary, S. Narayan, told presspersons here today after a meeting of the Cabinet Committee on Economic Affairs (CCEA) where the decisions regarding the UTI were taken.

As per the CCEA decisions, the UTI is being divided into two companies — UTI-1 and UTI-2.

All the "protected" schemes like the US-64 for which an assured repurchase price has been announced and assured return schemes will be placed under UTI-1 which will be managed by a Government-appointed administrator and a nominated team of advisers. The Government will meet its obligations annually to cover any deficit in UTI-1.

The UTI-2 will comprise all net asset value (NAV)-based schemes, including those units of US-64 which have been sold at a NAV-based price since January 2002.

This company will for the time being be managed by a professional chairman and a board of trustees recruited from the open market and will eventually be privatised. The time-frame for privatisation has not yet been decided.

Since the UTI-2 portfolio will be NAV-based, no Governmental financial support is envisaged for it.

To give effect to its decision to split the UTI, the Government will bring forward an ordinance to repeal the original UTI Act. It will also structure UTI-1 and UTI-2 as per the regulations of the Securities and Exchange Board of India.

According to Mr. Narayan, the UTI had a total net asset value of Rs. 42,000 crores as of June 30 this year. Of this, about Rs. 18,000 crores are NAV-based schemes which will go to UTI-2. Consequently, the balance Rs. 24,000 crores would be with UTI-1.

It has also been worked out that the liability of guaranteed repurchase price of the US-64 scheme would be approximately Rs. 6,081 crores, which could vary depending on market conditions.

In respect of the assured return schemes, the current shortfall is estimated to be Rs. 8,561 crores. In other words, the immediate Government liability is Rs. 14,642 crores.

To meet this liability, the Government has decided that the redemption liability during the current fiscal would be about Rs. 1,100 crores to Rs. 1,200 crores, which would be met through the budget. Already, Rs. 500 crores has been provided in the first batch of supplementary demands for grants and another Rs 500-odd crores is likely to be provided in the next supplementary demand. From the next fiscal, that is after April 2003, the real redemption pressure is likely to build up and to meet this, it is proposed to issue bonds on the lines of the Oil Bonds which will be a tradable instrument with a long-term tenure.

In other words, it would add to the public debt of the country but would not have an immediate effect on government finances.

To put off the immediate liability of redemptions of US-64 and to ensure that the UTI does not have to offload its equity holdings at one go, the tax sop on US-64 is being extended so that investors could hold on to the unit with an assured return of Rs. 12 a unit for the first 5,000 units and Rs. 10 for the rest along with tax benefits. The Government will keep the redemption facility open in case of the US-64 till the last investor withdraws.

In reply to a specific query, Mr. Narayan ruled out any retrenchment in the UTI because of its restructuring.

Highlights

UTI to be split into two companies.

Govt. guarantee on US-64, MIPs to continue.

US-64 redemption to continue beyond May 2003.

Tax sops on US-64 scheme.

Assured return schemes interest may go down.

UTI-1 to look after assured return schemes.

NAV-based schemes with UTI-2, to be eventually privatised.

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