The Hindu : Transforming the UTI

Online edition of India's National Newspaper
Saturday, Feb 08, 2003

Opinion

Opinion - Editorials

Transforming the UTI

A CAREFULLY THOUGHT-OUT transition plan for the country's oldest and still by far the biggest fund, Unit Trust of India (UTI), was implemented without major hiccups on February 1. The UTI was the first to channel individual savings into the securities market. Until 1988 it had no competition and, surprising as it may seem, no regulation to fall back upon. In fact, the term mutual fund itself entered the financial sector's lexicon only when competition first came in the form of new funds set up by a few public sector banks. The capital market regulator, the SEBI, was a creation of the late 1980s and by the time it framed rules for the mutual funds the UTI had completed 25 years. Those details are important if only to show that for almost three decades the UTI functioned in a vacuum. In the liberalising 1990s, however, those very traits undermined the Trust. For instance, the Government's interference in its day-to-day working was widely perceived, especially in the unprofessional investment decisions. Since there were no worthwhile benchmarks on crucial parameters such as profitability and safety of those investments, the UTI, long used to being a monopolist, did not have to alter its stance even when faced with competition. Through the 1990s, the UTI and specifically the flagship US 64 scheme ran into one crisis or another simply because there were no earnest attempts at restructuring it to face the new challenges.

As has been well documented, the US 64 scheme became unsustainable after repeatedly falling behind its own already lax standards. In June 1999, the Government seemingly having ignored prior warning signals and undertaken only fire-fighting measures had to step in aggressively. The immediate provocation was the suspension of the repurchase facility of the units of the US 64 scheme. Many dispassionate observers felt that the Government could not have been unaware of the state of affairs even if it was not consulted on the announcement to freeze repurchase. The rest is history. One of the most sensational shortcomings of the financial sector was discussed threadbare by a Joint Parliamentary Committee and by several expert groups. There have been plenty of ideas on how to restructure. After considerable deliberations the Government, having assured protection to the unit holders (at least up to the face value of units), decided to split the Trust into two — UTI - I, to house the US 64 and the regular return schemes, and UTI - II, to take care of the remaining market-oriented schemes. It is creditable that the Government persisted with this structure, even when many experts doubted its viability.

Now that its restructuring is over, it is time for the UTI or more appropriately its successors to prove a point or two. Much store has been set by the UTI Mutual Fund (as UTI-II is now called). It has come into being without the troubled legacy of its predecessor. All its schemes, collectively having the largest funds (of Rs.15, 000 crores) under management for any mutual fund, will follow the SEBI's directives from day one and be managed professionally. Hopefully, the new organisation will set new standards and ultimately enable the Government to recoup its outlay in defending the UTI earlier. A decision to privatise it has already been taken although for now the Government had to enlist a few leading public sector institutions and banks to be its sponsors. UTI-I will see the US 64 unit holders and a few regular income scheme investors through till redemption time. The Government has, on top of the existing assured buyback schemes, given the unit holders an option to convert their units into a new five-year tax-free bond. This is to stave off redemption pressures and is therefore a bold move to contain the expenses that are inevitable in any rescue package. If UTI-I is the defensive aspect of the UTI strategy, the UTI MF is meant to demonstrate professionalism while still remaining in the public sector. Their success may not undo their parent's troubled legacy but can surely spruce up its image even over the short-term.

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