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Malegam panel suggests strategic partner for UTI

Tamal Bandyopadhyay

The corporate repositioning committee of Unit Trust of India, headed by Y H Malegam, has recommended that the Trust rope in a strategic partner.

UTI chairman M Damodaran confirmed that the report will be taken up at the October 11 board meeting but refused to comment on the contents. "It was a board-appointed panel. The report will be discussed at the board before sending it to the finance ministry," Damodaran said.

According to sources, the idea of bringing in a strategic partner has more to do with the image of UTI than its expertise in fund management.

"The presence of the strategic partner will help UTI change the image of a government-run organisation," sources said.

Once the UTI Act is amended, the mutual fund will be delinked from the Industrial Development Bank of India which currently holds 50 per cent stake in UTI while the balance is held by LIC, SBI, GIC and other banks and institutions.

UTI, which has a structure different from the Sebi-mandated three-tier structure of other mutual funds, was established by the government under a special Act-the Unit Trust of India Act, 1963 -- as a corporate body.

The Malegam panel is in favour of aligning the UTI structure with other mutual funds and making it Securities and Exchange Board of India-compliant in all respects.

The strategic partner, going by the recommendations, is to be roped in at the asset management company level, which will manage the funds.

The UTI Act will be amended by making several changes in the structure of the Trust.

However, it is unlikely to be tabled in the winter session of Parliament as too many bills are pending, said a source. Unlike other mutual funds, UTI is a statutory corporate body and not a Trust under the Indian Trusts Act.

There is no separate asset management company but only individual board of directors to manage the assets of the schemes.

The board of trustees of UTI on June 30 last year approved the formation of the "corporate positioning committee" to draw up a corporate plan for the fund.

The seven-member committee, headed by Malegam, was constituted to revisit the Deepak Parekh panel report on UTI and recommend an appropriate repositioning plan to the board.

The other members of the committee include Arvind Virmani, economic advisor in the finance ministry, R P Chitale, managing partner of M P Chitale & Co and a trustee of UTI, N S Sekhsaria, managing director, Gujarat Ambuja Cements and also a trustee of UTI, J Bhagwati, joint secretary in the finance ministry, and Cyril Shroff, solicitor and partner of Amarchand & Mangaldas & Suresh A Shroff & Co.

The terms and references of the panel include:

• Reviewing the competitive and commercial positioning of UTI in the light of the second generation reforms in the financial sector and emerging developments in the area of mutual fund business and globalisation of the Indian financial services sector;
• Studying regulatory aspects the obligations of UTI under the UTI Act, including the implications of any change in the above context;
• Studying the trend towards broader financial service companies;
• Assessing confidence of investors in financial organisations of differing sizes and strengths; and
• Evaluating the progress of implementation of the recommendations of the Deepak Parekh Committee.

UTI rolls over bank loans for 6 months more

Unit Trust of India has rolled over Rs 24.50 billion worth of bank loans by six months, till March 2002. The State Bank of India has lent bulk of this fund-Rs 15 billion-and the rest was sourced from a clutch of banks.

"The bank funds were taken for six months to tide over a temporary liquidity problem. It was due for redemption but we are rolling over the facility for another six months," UTI chairman M Damodaran said.

Banks had lent this fund at the sub-prime rate of around 10.5 per cent. Damodaran said there is no liquidity crisis in UTI and its flagship scheme US-64 will be linked to its net asset value on January 1, 2002.

"On the same day we will lift the freeze on sale and repurchase of US-64 beyond 3,000 units," he said.

"We had earlier planned to link US-64 to NAV in October but that could not be done in the wake of the US crisis," Damodaran said.

The UTI chairman does not foresee a mad rush for redemptions once the sale and repurchase window opens.

"People are likely to stick to US-64 since there are not many better investment options. We will also offer them an option to switch over to other UTI schemes, if they want to. There will also be new buyers of the units which could be available at below the face value of Rs 10 if its NAV is lower than that. A tax-free dividend on that would be attractive," Damodaran pointed out.

In the worst possible scenario, if every unitholder wants to sell off his holdings at the administered price (Rs 10.50 in January), UTI will end up with a hit of Rs 60 billion. "I don't see that happening. Our internal estimate is a total redemption of between Rs 8-10 billion by January," the UTI chairman said.

In the first two months (August-September) since UTI started repurchases of US-64 at the administered price of Rs 10, the total outflow of funds was to the tune of Rs 2.08 billion. On average, it is witnessing an outgo of Rs 1 billion per month.

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