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Investor confidence intact, claim UTI bosses

Priya Ganapati in Bombay

By their own admission, the next few nights will be sleepless ones for the UTI brass. The honchos at the Unit Trust of India, India's largest mutual fund organisation, will not be pontificating over what went wrong with US-64, one of its most popular mutual fund schemes.

Instead, they will deliberate on how to extricate themselves from the mess that UTI has landed itself in since P S Subramanyam, former chairman of UTI, announced a freeze on the sale and repurchase of US-64 units on July 2.

That decision has already proved to be quite costly. It cost Subramanyam his job and has set officials of the finance ministry breathing down the necks of the rest of UTI mandarins.

The trust's officials will be working hard this weekend to draw up a package that will propose an exit strategy for small investors who will be the most affected.

The UTI board will meet on July 9 to ratify a deal that, as acting chairman K G Vassal, will ensure that 'everybody is happy'.

It is going to be a tall order. However, the UTI brass maintains that the small investor's confidence is intact and the market still has faith in it, the US-64 crisis notwithstanding.

To buttress its claim, UTI has released figures to show that between July 2 and July 5, the trust's sales in all the other schemes -- except US-64 -- were at Rs 1.53 billion, while repurchases stood at Rs 260 million.

This is against the Rs 120-million and Rs 160-million in repurchases for the same period last year.

"This shows that the investor has not lost confidence in us. The redemptions on our other schemes are far lesser than the sales, which proves our point," says B G Daga, executive director, UTI.

As of June 30, UTI manages funds of over Rs 751.59 billion and has over 43 million investor accounts. UTI has 87 schemes, of which 38 are open-ended and 49 close-ended. The US-64 scheme nearly 20 million unit holders.

The board meeting on July 9 is expected to be the first in a series of meets that will work out a solution to the freeze on the sale and repurchase of US-64 units.

"We will present our proposal to the board. If it ratifies it immediately it would be excellent. But if it does not, then we will go back and work out an acceptable solution. By the end of next week, we would have completed the process," Daga says.

Despite the confidence he exudes, it is not going to be an easy task. For every proposal that the board approves will also need ratification from the finance ministry. The finance ministry was the first to express its disapproval of UTI's ban on the sale and repurchase of US-64 units.

"It is not that UTI board's decision will be subject to the approval of the finance ministry. But the government has expressed its desire that we ensure an exit route for small investors and so we will definitely keep them in the know," says Daga.

US-64's corpus has eroded greatly this year. Towards, the beginning of the year, the corpus was at Rs 155.05 billion. Now, it is being pegged at Rs 127.72 billion. Experts feel that if UTI had only implemented all the recommendations of the Deepak Parekh Committee then this erosion would not have occurred.

Daga has a different view. "We have implemented almost all of the recommendations except for four. Two of those -- creation of a separate asset management company for US-64 and bringing operations under the purview of Sebi -- require amendments to the UTI Act (US-64 is governed by the UTI Act). And it is the government that has to make those amendments. As for US-64 becoming an NAV-driven scheme, it is scheduled to happen in 2002. So why is everyone saying we haven't implemented the Parekh committee report?" he questions.

Daga goes on to assert that all is well with the scheme and the six-month ban on sale and repurchase of UTI's US-64 scheme is only to boost the prospects of the thousands of small investors who have invested in the scheme.

"UTI is a 37-year-old institution. Our track record is the biggest proof of the steps we have taken to maintain the confidence that investors have in us. We don't see the need for any new confidence building measures," says Vassal, the acting chairman.

But UTI's decision to impose a six-month freeze on sale and repurchase of US-64 has raised many questions. How was the six-month time frame chosen? What did UTI expect from the freeze?

Vassal has no clear answers.

"First, the resolution passed by the board does not say six months. It says 'up to six months'. This means that we may review the decision if the market conditions improve. Also, we thought that once the ban on badla comes into effect on July 2, the market would stabilise and over the next months, we could have a more optimistic feeling on the stock markets," he explains.

UTI's decision on US-64 has indubitably hurt the small investor the most.

The bulk of the redemption in US-64 units, amounting to Rs 41.51 billion in April-May 2001 was from corporates. The small investor is the one who has been steadily sticking with UTI.

Vassal assures that the small investor will not be hurt. "Our track record shows that whatever we have done has always been for the benefit of the small investor. We will maintain our record of protecting the small investor as this is one of the major objectives for which this institution was built," he declares.

In the midst of this crisis, UTI has another announcement to make. It will launch an open-ended monthly income plan scheme again for the benefit of small investors. The scheme is expected to be launched over the next few months.

Whether the small investor's confidence in UTI will remain intact till then, is something that will depend on what the UTI board comes up with on Monday.

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