A saviour for UTI and small investors

Restructuring is the challenge for the new chairman

S S Tarapore

S S Tarapore

The Unit Trust of India (UTI), when announcing on July 2, 2001 the cessation of repurchase of US-64, had probably not comprehended the angst it would generate. Like a Phoenix risen from the ashes small investors, aided by the media, have fought back and the government has assuaged small investors with an indirect bailout.

The UTI has deftly tackled the immediate crisis by offering a repurchase price of Rs 10 from August 2001, rising by 10 paise every month. This will prevent an avalanche of sales. But the small investor needs to be guided, at least by the financial media. It is not as if the UTI does not know the approximate net asset value (NAV); the hold-back of this crucial information implies that the NAV is much lower than analysts have feared.

A number of other questions arise. How will UTI handle the problem of multiple folios? Secondly, who will bear the cost of the difference between the repurchase price and the NAV and, furthermore, who will bear the cost of borrowing from banks and financial institutions? Thirdly, with these problems, the outlook is that future dividends will be even lower than the current 10 per cent.

While not creating a mass hysteria, what can be fair advice to small holders? Small holders up to 3,000 units should exit from US-64 in August 2001 and seek other opportunities like HDFC deposit if one is not a tax payer and UTI’s own Mastershare if one is a tax payer. Holders with more than one folio should try to exit upto 3,000 units under each folio. Small investors would be well advised to refrain from fresh purchases, which will open up from January 2002 at least till July 2003. The UTI should not aggressively campaign fresh sales for small investors, at least in remote areas till it sets its house in order.

When sales are resumed in January 2002, US-64 should be limited strictly to individuals. The UTI has institutional investor schemes and it would only be apposite that non-individuals should invest only in these. Non-individual holders could be provided with swap facilities to move from US-64 to the institutional investor schemes strictly on an NAV basis. Once this is done US-64 would become what it was originally intended to be, an individual investors scheme.

As regards the UTI debacle and the investigation thereto, this should be handled very carefully. There must be a clear delineation between a genuine commercial loss and malfeasance (official misconduct) or misfeasance (wrongful exercise of lawful authority). The authority making a preliminary judgement has to arrive at an assessment taking into account only such information as was available at the time the investment decision was taken. It is necessary to avoid drawing conclusions on the malafides of a transaction based on information and events after the investment decision.

The intention is not to condone rapacious activity, if any, but we should not indulge in unfair burning at the stakes. The investigative agencies now have a technically equipped and experienced system in place with a pre-investigation Advisory Board, and there should, therefore, be no danger of a witch-hunt.

While not underestimating the problem of restructuring, let us recognise that the UTI is reformable. Continuing the status quo may appear convenient but it would be reflective of irrational intelligence. As I have already indicated in my column of July 11, it is not humanly possible for the UTI management to take decisions which are in the interest of all schemes. It is no secret that US-64, as the mother scheme, had for years provided succour to the smaller schemes and there is at least anecdotal evidence of some of the Monthly Income Plan (MIP) schemes looking after the ailing mother US-64.

This is not a sensible way to function. The real problem is that any legitimate transaction by the UTI sends ripples through the market and the sheer size and reach of the UTI, which is its unique strength, is also its greatest handicap.

One fervently hopes that the Committee on Corporate Repositioning of the UTI headed by Y H Malegam would bite the bullet and give short shrift to the scatter-brained idea of splitting US-64 into two schemes. Under this proposal a holder of, say, 100 units will get 70 units in US-64 (equity) and 30 units in US-64 (debt). Obviously, the debt scheme would have an NAV of around Rs 13 and this will have a repurchase facility while the equity scheme with an NAV of, say, Rs 7. This is grossly unfair to individual holders who would be forced into schemes they have not opted to invest in. This proposal should be tossed out.

As I advocated in my column of June 13, the Malegam Committee should consider the trifurcation of UTI into three separate and distinct entities. All equity, or predominantly equity, schemes could be in one institution, all debt, or predominantly debt, schemes could be in the second institution and the US-64 should be a stand-alone third institution.

All these institutions should be fully regulated by the Securities and Exchange Board of India (Sebi) and the UTI Act should be abrogated. Each institution should have its own trustee company and asset management company and it should function like any other mutual fund. The brand name UTI does have value and each of the three institutions should be allowed to use the prefix UTI as a brand name. It is important to excoriate the fungus of the status quo. We need to make investors less afraid of change, particularly change which is in their interests.

The government is often criticised for procrastination and sometimes pilloried for wrong choices for key appointments. In appointing M Damodaran as UTI chairman it has at one stroke demolished such criticism. The UTI is indeed fortunate to now have at its helm a veteran of crisis management. In a sense, Mr Damodaran is, in a way, God’s gift to small investors who in recent years have been buffeted by the rapacity of large corporates and institutions. There is merit in Mr Damodaran’s one-year term in that he is seen as a chairman to undertake the fundamental restructuring. No chairman with, say, a five-year term would like to trifurcate his empire. Mr Damodaran could well be the saviour of small investors.