UTI’s been sniffing for a while

Merge it with an SBI or an LIC and save the market a terrible cold

PN Vijay

Nothing illustrates the state of affairs in the Indian bourses as starkly as the decline and fall of India’s leading mutual fund institution — the Unit Trust of India (UTI). Occupying as it does a commanding position in the Indian market, when it sneezes the market gets a cold. Therefore it is abundantly clear that any prescription for the long-term health of the market should involve a solution to the maladies of the UTI.

To many of us — who have learnt our ropes in the market in the ’60s and ’70s — the UTI still remains a cult figure. Started with the visionary zeal of people like Dr R S Bhat, Mr G S Patel, and others, it was a strong signal to the world that India could also produce a first-class market institution. The heyday of UTI was however during the M J Pherwani regime in the ’80’s. Basically an insurance man who had been groomed under the strict tutelage of British investment advisors, Mr Pherwani made the UTI synonymous with institutional investors. Built like a bull himself, he would often say, “I am a perennial bull in this market.” Running a lean and hungry outfit without any frills, he made the UTI one of the most admired institutions in India.

All that now seems like a fairy tale. In the last few years the problems of the UTI have gone from bad to worse. It spread its investment portfolio into hundreds of shares and debentures, many of them of doubtful quality. The bear market also took its toll. Two years ago the government had to appoint a high-powered committee to look into its financial affairs. Many strategic decisions were made, including one to make its flagship scheme, US-64, net-asset-value-based within a time schedule which expires next year. The government also pumped in taxpayers’ money to set things right. However, it now appears that things are in bad shape again.

The market share of the UTI has been steeply falling — a sure sign of things going wrong in any industry. Even more serious at the macro level is the fact that fresh money is not coming in fast enough. In many of the schemes, repurchases are in excess of sales. To compound the problem, its investment portfolio has taken a major hit in the bear market and people who are stuck with it are an unhappy lot.

One may ask: Why get worried if it really does not affect the community? After all, there are many government-owned institutions which are doing badly and losing money. However, this is no normal government institution. Because it is not generating enough liquidity and profits, reports indicate that the UTI is selling heavily in the market to honour dividend payments due next month. That is sending reverberations in the market, which is even now struggling to keep pace with the dramatic changes in trading practices.

Ironically, even as the government is pushing hard with its market-friendly budget, full of tax cuts and sops, the main investment wing of the government is busy selling shares to keep afloat. So the problems of the UTI are getting reflected as problems for the market as a whole.

The government is also likely to face a situation where it may have to dole out some more taxpayers’ money. This would be terrible indeed. The genesis of this is the vast gap between the net asset value (NAV) of the securities in US-64 and the repurchase price that the UTI commits to the unit holders. Because of this gap, which is stated to be of the order of Rs 4-5 per unit, the UTI is in the strange situation of losing money even as it honours its repurchases. For those who stay on, it is committed to giving a dividend whose post-tax yield is much higher than other instruments offered.

Corrective actions are required if this dismal situation is to end. My view is that tinkering with the balance sheet and quick-fix solutions will not do. Such restructuring will have to take into account the momentous changes that are happening in the financial sector. International powerhouses are entering India in the arenas of funds management, insurance and banking; and universal banking is round the corner. The government will have to seriously think of merging the UTI with some other larger government entity such as the State Bank of India (SBI) or the Life Insurance Corporation of India (LIC). The advantage of such a move is manifold.

First, the government need not shell out money for another bailout. Second, for investors there will not be any flight away from quality. It is very important to remember that, with all its problems, the UTI is still regarded as one of the most trusted institutions by the Indian public. Since the SBI and the LIC are perceived similarly by the Indian middle class, there will not be any ‘perception’ problem. Further, the workforce — and the UTI has some of the best investment managers in the country — will not be at a disadvantage and, lastly, we may well have created a powerful Indian institution to take on the ever-increasing challenge of multinational powerhouses.

God knows that with major mergers of commercial and investment banks the world over, the position of the UTI is under threat, even if it did not have the problems peculiar to it. We need to act pretty fast now. This is the season for taking tough decisions on the stock market. This could be one such. The time to act is now. There cannot be any holy cows once we have adopted a market-based economy. If democracy consists of the greatest good for the greatest number, doling out taxpayers’ money — which could be better used for hospitals and schools — to bail out mutual funds will be anti-people.

Mr Vijay is a Delhi-based investment banker, pnvijay@vsnl.com