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'UTI to focus on good fund managers, better systemic supports'

Meleveetil Damodaran, chairman of the Unit Trust of India, is a much-relaxed man now. The immediate crisis that surrounded the Unit Scheme-64 has dissipated - at least for the moment.

The redemption pressure that was expected when the UTI counters for the sale of US-64 units were opened did not materialise.

The myth about the UTI having lost investor confidence was, to an extent, debunked. And the UTI had bought time on its hands till January 1, when the net asset value of the scheme -- till now of the best guarded secrets in the financial world -- would be announced.

If the NAV of the fund then is not close to the face value of Rs 10 of each unit, all hell could break lose. And Damodaran knows that.

But for now, he refuses to be worried.

There is still time and he has a few aces up his sleeve. Quietly, he has been working to streamline fund management and remove illiquid assets out of US-64's books.

The selection of Damodaran on July 15 to head the UTI, a joint secretary in the finance ministry's banking division and officer on special duty at the Reserve Bank of India surprised financial institutions, banks and business.

His appointment was a departure from the norm: recent chairmen of India's largest mutual fund have had some institutional background.

But Damodaran has charmed his critics. Articulate and extremely disarming, he has ushered in an accessibility that was absent earlier. The focus now is on projecting the UTI, whose image had taken a severe beating in the last few months, as an open and friendly organisation.

In the last few days, he has been struggling through presentations by public relations firms on how the UTI can communicate better with the investors and project itself in a more positive light.

"They tell me that I am not reaching out enough to the people. I need to talk to them more and explain ourselves better," he smiles.

Three-and-a-half months into the hot seat, M Damodaran spoke to Priya Ganapati about the status of US-64 in the current market scenario and the other issues that plague UTI.

Market conditions have deteriorated further since the last few weeks. How has that impacted US-64?

In the last one week, the market has looked up and we think that is a trend that will continue hopefully for some more time. Whenever the market loses, US-64 will lose because the equity portfolio of US-64 has on it all the heavy weights in the market. So to the extent that they lose value because of a fall in the market, US-64 will also lose value.

But our expectation is, notwithstanding what happened on September 11 and the temporary setback that was suffered at that point in time, the market is on course to gaining ground. Consequently, US-64 will also make gains.

But will the recent developments with respect to Afghanistan not pull the market down further? Why do you think it will gain ground?

I think on the day the attacks commenced the market witnessed a fall, but thereafter the market has only gained ground which would give me the impression that it has already discounted the war factor.

In fact, I think the war was a long time coming and therefore the market had enough time to discount it, touch the lows that it did and thereafter it has only been going?

So, what is the position of the US-64 NAV? Has it gone down further or is it looking up?

It hasn't looked up, let me put it that way. I am not in a position to give you a number at this point of time. It hasn't gone up to the extent that we thought it would because, honestly, September 11 was not something any fund manager could have factored in into the scheme of things.

Otherwise, there were positive signs prior to September 11 that we are slowly beginning to impact the market. In between, foreign funds had sold heavily. That naturally, depressed the market a little bit. They had their own redemption pressures, but the factors that should affect the market for a reasonable length of time are all positive.

When the NAV disclosure date is just two months away, aside from keeping hoping that the market will look up, what else is UTI doing?

Let me say one thing very clearly. On January 1, US-64 will go NAV-based. Contrary to speculation in some sections of the media there is no proposal at all to extend the date on which US-64 will be NAV-based. If the NAV is less than the face value of the unit, that will be the value at which units in excess of 3,000 would be bought and sold.

We believe that if the NAV is, as it ought to be, not close enough to the face value there's going to be no immediate repurchase pressure.

Two reasons: Firstly, no one would want to convert a temporary loss in value to a permanent loss by exiting at that point in time unless he or she needs money desperately. Two, there is going to be excellent buy opportunities for persons who would want to come into the scheme at that time in the event of us choosing to sell units then. However, that's a view we have not yet taken.

But then to only depend on the market to look up, for the NAV to improve cannot be the only solution?

The NAV of a fund, which is heavily into equities, would have to be conditioned by the equity markets. There is a debt portfolio, which is a little upwards of 30 per cent. But US-64's returns from the debt component are and can never be dramatic enough to give the kind of increases that we are looking for.

If there is going to be any dramatic increase, it quite clearly will be through the equity component of the portfolio. Throughout the world and throughout the known history of capital markets, on a long-term basis it is equity and not debt that has yielded results.

Debt gives you less volatility in what you get normally, that's again only in normal times. Equity not withstanding the volatility gives the long-term investor better returns if he or she times his entry and exit at the right times.

Therefore, I think the number of trading days that we have between now and December 31, might not present us dramatic opportunities, but I think they will do this. They will show improvement over where we are now. That will convince the investor that we are on the right track and come January there is no compulsion to exit.

What about other measures to improve the NAV, like strategic sales, for instance?

You see, a strategic sale if it takes place at this point of time is not going to take place at a price entirely unrelated to the price of the scrip. Here, we are talking about scrips that are actively traded and have large holdings. We might get something more than the market can give us, but it is not going to be very much more than the market.

It is not as if January 1 is the end of the world. We are not looking at a situation when we will make small gains now by strategic sales as compared to larger gains over time post-January 1 in a slightly healthier market.

We are looking at strategic sales in two sets of circumstances. One is the companies that have shares illiquid at this point of time and we want to get them off our books. We are talking to the promoters. Two: where there is a possibility that companies are buying into own stocks or the foreign partners are coming in, picking up shares in the domestic units and we have a reasonable holding.

We know that after that purchase, the shareholding will be somewhat skewed. It's will not give us enough mileage in the market. There's also the possibility of delisting in certain cases and in those cases we are exiting from our holdings from where we have marginal holdings. In those set of circumstances we are exiting not in normal course where a scrip is actively traded and we expect that the market will go up. We are not maximising values prior to January 1.

So what do you see as the priority before yourself at this stage?

Two things, really. One is to put better fund managers in place. Give them more freedom to manage their funds. We have a lot of talent in house. We have identified all the good performers and we are giving them responsibility for managing their own funds. Everyone will have the freedom and the responsibility that goes with it.

The second is to put in place systemic supports for fund managers, in terms of access to information, access to quality equity research reports in-house, access to reports from outside, in-house discussions, etc.

It is about enabling fund managers to translate what clearly is abundant potential into outstanding performance.

UTI cut down retirement age from 60 to 58. What was the thought process that went behind that decision?

I think every organisation over time needs to ask itself a few fundamental questions. It needs to ask itself whether the senior management in the organisation comprises persons with the right kind of experience, exposure, attitudes and put together provide the cohesiveness that the organisation needs at a particular period.

It is no comment at all on the persons that are immediately affected as a result of this. But it does happen that when an organisation looks at itself afresh, at some point of time you find that some persons who added considerable value over time are now perhaps not the kind of persons that you are looking to provide value at this juncture.

You also need to create very quickly in the present time opportunities for younger people to move enough, who have patiently waited long enough and have not been able to express themselves adequately by way of their decision-making process. That, I think, is what reduction in the retirement age will provide.

What was the reaction from the senior generals in the organisation?

It took 30 seconds to get this decision passed by the board. I did mention this possibility sometime ago. It is not that they were caught totally unawares. I must mention to you that at least two of them told me that they expected this decision in the last board meeting and not this board meeting! So there was, I suppose, an element of preparedness.

Many thought that it was coming. Quite clearly, no one wants to exit the organisation when they have got two years to go. It's not as if that people are thrilled that they have to go because of the reduction, but it's not something that was entirely unexpected. As for resistance, there was none at all.

You have recently taken over as chairman of Infrastructure Leasing and Financial Services Ltd, which was in the process of restructuring some of its operations. How do you view the company now? What are the issues that you see there that need to be taken care of?

I don't want to say anything on IL&FS largely because I have not looked at it as closely as I would have liked to look at it. It is an additional responsibility for me. I took over as chairman because the previous chief of the UTI was the chairman of IL&FS and we wanted to provide some kind of continuity to this.

It is not that the UTI chairman necessarily heads IL&FS. We have a vice-chairman and chief executive who is running the company and I think he's doing a good job. The only question that occurs to me is if IL&FS should have as many subsidiary companies as it does and we need to address that issue. Other than that IL&FS is doing fine.

US-64 owns over Rs 8 billion of fully valued real estate and has been the space provider for all other schemes and institutions promoted by it. Is there any way that you are looking at making this real estate earn money for the scheme?

US-64 no longer owns the real estate. US-64, till a month ago, owned real estate. All the real estate that was with UTI was owned by US-64.

As of now it is the DRF which owns that and the DRF has paid US-64 money for that.

What is the DRF?

It is the development reserve fund which we have. All the earlier schemes used to pay money to US-64 for using premises. Now all schemes, US-64 included, will pay money to the DRF for using the premises. What it provides is that immediately you have got assets which in today's times are illiquid.

This is not the best time to sell real estate. So we have taken that out of US-64 and brought in that much more liquidity by putting it in the DRF.

You have ruled out any split in US-64 and said that investors will be given several safe exit options. What is the development on this?

I think investors will look at three set of options. One is, the best according to me, continuing with the scheme. Those that don't want to continue with the scheme will do largely because there are liquidity requirements that will prompt them to opt out. Because if you opt out of the scheme for exploring investment avenues which are going to give you safe returns, give you liquidity and give you reasonably high returns, I do not think that there are too many such opportunities outside.

But we are working on methods by which if somebody is uncomfortable with US-64, but wants to stay with a UTI scheme, we would give them one or more options to move to other schemes. This is something that is still on the drawing board. We haven't fleshed out the proposals yet. Maybe I will be able to tell you more about this a little later.

So by when do you expect to flesh out the exit options for all investors?

I think a couple of weeks down the line we should have got fairly close to looking at all the options going to be made available.

There is also much talk of simplifying UTI's existing schemes. How far has this progressed and how will it result in higher returns for the investors?

Let me tell you what we are going to do first because that's much the simpler thing. What we are not going to do is to have more of these assured return close-ended schemes because that I think has been one of the problem areas for UTI.

At the time when interest rates were reasonably high, we promised returns based on those interest rates without providing for the possibility of interest rates going southwards at the pace at which they did. That kind of thing will not happen again.

Secondly, there are existing income schemes, which have more equity on their portfolio than an income scheme needs to have because it necessarily brings in a volatility that an income scheme should not have.

That issue is being addressed. We are taking out to the extent the market can provide exit options, getting rid of excess equity and bringing in more debt into the portfolio.

One of the things that we are doing for people who are a little more risk averse than the average mutual fund investor and do not want to go entirely by a fund manager's active management of a fund. We are encouraging such people to go invest in one of our two index funds -- which are passive funds that track the Sensex.

There our performance is much better than the other index funds. Funds are flowing into those schemes. We are bringing in new features into our schemes to provide income options where none existed and reducing lock-in periods. We are trying to see whether for specific client groups we need to think up new schemes which will better meet requirements than what is there. That broadly is the canvas.

The UTI's non-performing assets are on an upward spiral. They stand at Rs 56.93 billion against Rs 36.94 billion provision made for them. What is the action plan on that?

I am glad you raised this question because everyone looks at equity as a problem area and thinks that debt is a relatively problem-free area. All of the NPAs are by definition in the debt area because equity does not have an NPA component.

What happens is that large number of debt instruments in which the UTI invested have not performed as regularly as they should have and given the tighter norms that the Securities and Exchange Board of India has introduced those that were earlier not recognised as non-performing now have to be classed as non-performing.

That is one, the other is that at the end of the day, financial sector is only a support sector. If the real sector is not able to perform, if there is sickness in the real sector then they will sooner rather than later impact the financial sector. Which is what is happening not only to UTI, but also to banks and big investors.

It is certainly an area of worry. In fact, when people talk about privatisation that I would like to remind them that all the NPAs sitting on our books are the result of private sector management and not public sector management.

So what is being done about the NPAs?

What you are looking at is the gross NPA. In terms of provisioning norms we have provided whatever needs to be provided. There is an amount that is not provided because for every NPA you don't provide 100 per cent immediately on its becoming an NPA. The second aspect is that there are wilful defaulters and there are non-wilful defaulters.

Wherever on we find that the defaulter has the funds to service the dues and is not doing that, we take whatever legal course is available to us immediately.

When they come to us and ask for time we certainly insist on at least part-payment and post-dated cheques. In the event of post-dated cheques not being honoured, we are taking recourse to Section 138 of the Negotiable Instruments Act. We filed a large number of cases recently more than we had filed in the past.

How many more?

I won't be able to give you a number at this point in time, but everyday my people are putting up newer cases. Not because we want to go to court in order to recover but to send a very clear message across that if you are going to default its not going to come to you in a risk free situation.

Just as we take a risk when we invest in your instrument, you take a risk when you give us a post-dated cheque and you are unable to honour that cheque.

We are going to debt recovery tribunals. We have appointed more lawyers in various courts so that each lawyer handles only the manageable minimum. We are reviewing the performance of our lawyers to see who is giving us value for money.

We are not adding to it by way of any fresh investments because all our fresh investment decisions are quite clearly not going to be in unrated instruments or below investment grade instruments or private placements of unlisted companies.

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