Far-reaching changes suggested by panel

UTI throws open Malegam report for public debate

Our Markets Bureau

Mumbai, Oct 30: In a major development, the board of trustees of the Unit Trust of India (UTI) on Tuesday decided to throw open for public debate the recommendations of the YH Malegam committee on the trust’s corporate positioning. The panel has made far-reaching recommendations on overhauling the structure of the mutual fund (MF) behemoth. UTI wants to get feedback from its stakeholders, unitholders and the public at large on this crucial subject.

The Corporate Positioning Committee (CPC), as the panel is called, has suggested that the structure of UTI should be in line with the Securities and Exchange Board of India (Sebi) regulations as applicable to MFs, which is to have a sponsor, a trustee company and an asset management company (AMC) in three tiers.

The UTI Act, the panel has suggested, should be repealed and replaced by a new enactment. In doing so, it should be ensured
that the government is totally distanced from UTI, the panel
has said.

The panel has also suggested that the sponsor be a sponsoring company in which 40 per cent of the share capital should be held by the institutions which currently hold an initial capital of UTI of Rs 5 crore. This was later enhanced in 1999 to Rs 445.50 crore following the Deepak Parekh committee recommendations.

The Malegham panel has also suggested that as much as 60 per cent of the sponsoring company’s share capital should be held by a strategic partner who “is a recognised player in the market and whose reputation and competence are expected to give the required degree of confidence to the unitholders.” The field of selection of the strategic partner need not be restricted to Indian entities alone, the panel added.

The stakeholding of the sponsoring company, the CPC has suggested, should be restricted to 40 per cent in the AMC, with 60 per cent offered to the public so that the large funds held by UTI, particularly the large stakes in individual corporates, does not rest with a single individual or group.

Addressing mediapersons after the board meeting, UTI chairman M Damodaran said that these far-reaching recommendations, having significant impact, should be adequately publicised to stakeholders and unitholders so that they can understand the issues and get appropriate views on them.

“Further, the board, in taking the decision, has been guided by the fact that these recommendations constitute a fundamental change with respect to ownership, structural and operational aspects of UTI,” Mr Damodaran explained.

The report, the UTI chairman said, would be posted on the UTI website — www.unittrustofindia.com — on Wednesday.

The panel comprised, Mr Malegam apart, Mr RP Chitale, Mr Cyril Shroff and Dr Jaimini Bhagwati of the finance ministry.

The panel has also suggested that to ensure the confidence of unitholders is not adversely affected by a sudden withdrawal of the government umbrella, there should be a ‘lock-in’ period of three years during which the sponsoring institutions may transfer their shareholdings in the sponsoring company amongst themselves but not to the strategic partner or to third parties.

The two key issues prior to the structural changes being attempted have been highlighted by the panel. These are that the flagship scheme of UTI, US-64, should turn net asset value-based (NAV) before the recast. Second, the panel said it is also necessary that before the US-64 goes to NAV mode, provision is made for the contingent liability arising out of the gap, if any, between the available assets of the scheme and guaranteed price to individual unitholders’ holdings up to 3,000 units announced in July 2001.

Mr Damodaran did not, however, outline a time-frame within which the feedback from the public would be sought. “Let us get the feedback first. Then we will take further steps as necessary,” he said. He also did not say whether UTI would at all begin looking for a strategic partner now, as suggested in the Malegam report.

The panel has also suggested a strategy for dealing with UTI’s assured return schemes. Also, it has said that UTI’s Development Reserve Fund (DRF), which guarantees the returns, should be transferred to the AMC free of consideration after valuing the investments of the fund at their fair market value. The panel has also recommended that there should be a valuation made of UTI as a whole by an independent valuer. This valuation should take into account the goodwill attached to the trust arising out of its large unitholder base, its low operating costs as a percentage of investible funds, and other relevant factors.

The prospective strategic partner should be invited to quote the value at which UTI’s infrastructure and organisation should be converted into the AMC. If this value exceeds the value of the assets of the schemes, the excess should be credited to the various schemes in an appropriate manner. If, however, the value falls short of the value of the assets, the shortfall, if not met by the holders of initial capital of UTI and/or government, will need a reduction of the benefits under the assured return schemes in an appropriate manner.