Cleaning up UTI

Empower present management, punish previous one

The Unit Trust of India is a colossal mess, but given the circumstances, the current bailout has been structured carefully to minimise the damage. The redemption limit for the retail bailout has been enhanced to 5,000 units satisfying small unit-holders, and institutional investors have been persuaded to hang on until May 31, 2003 by guaranteeing redemption at Rs 10 on that day. Since an earlier exit would be at Net Asset Value, large investors know that the government guaranteed exit is a better option and provides a higher return than most fixed income investments. Further, the Rs 3,000 crore line of credit is UTI’s second line of defence, allowing it not to resort to panic selling. The sequencing of announcements has ensured that investors have absorbed the shock of UTI’s Rs 5.81 NAV without serious panic. That said, everything else about the bailout has been outrageous.

Of the many government actions, the four-member advisory committee is probably the worst and one would have expected its eminent members to have refused to lend their names to a government cover-up. Firstly, the advisory committee emasculates the role of the chairman and the board of trustees instead of strengthening it. Also, the advisors have power without statutory responsibility; it also allows the UTI management to pass the buck if it wishes to. The group’s recommendations have either not been made public, rejected, or simply been inadequate. What is worse is the government’s attempt to split the UTI problem and handle only one tiny portion at a time. The Malegam committee had repeatedly stressed that many of the 25 assured return schemes together are as big a problem as the US-64 or worse. How long can this go on? The government needs to amend the UTI Act urgently, with an ordinance if necessary. Secondly, it has to scrap the advisory committee. Fund management needs swift decision-making in response to changing market conditions — it cannot happen with an advisory committee breathing down UTI’s neck. Instead, the chairman and the board of trustees must be made more accountable. Thirdly, tax payers have the right to know the exact cost of bailing out all of UTI’s beleaguered schemes; this must be quantified and made public. Finally, criminal proceedings should be initiated immediately against UTI’s former management to demonstrate that public wealth and trust cannot be destroyed with such impunity.