So the government finally did stand by the Unit Trust of India. After several weeks of acting indifferent and trying to pretend that UTI was nobody?s child, the Government of India gave the guarantee on the back of which UTI could raise the Rs 1,000 crore from the State Bank of India to tide over the immediate crisis of the shortfalls in its assured returns schemes. This column has made it clear more than once that UTI is a government entity and there is no alternative to a quasi-public sector role for the institution, given its legacy and the constituency it serves. That, however, is not to mean that it should not function as a business entity in tune with market realities. By serving up the guarantee, the government has clearly indicated that whatever be the legal position, UTI is indeed the child of the Government of India.

One year after the US-64 crisis broke, it is time to take stock of what?s really happening at the country?s largest mutual fund. A year after the Trust faced what was clearly its worst-ever crisis, UTI?s chairman M Damodaran, who came in one Sunday afternoon last July to take charge of the tottering institution after a distinguished stint as a turnaround manager for the three weak public sector banks, has shown that the government was, indeed, right this time in the selection of the candidate for the top job at UTI. Though Mr Damodaran still won?t say anything about his continuance at UTI, the finance ministry has already given him another two years to continue the work he has started at the Trust.

Consider the present situation at UTI. US-64 is currently well within control, with a couple of government-backed administered repurchase schemes in progress to stem outflows. The schemes have worked and there?s no real panic or rush from investors to cash out of the scheme. Besides, US-64 has also outperformed the sensex ever since it went NAV-based from January 1 this year. And this time, the Trust has been able to muster courage, resist playing the perilous game of playing to the galleries, and has skipped dividend for US-64. With the government guarantee coming in (which was clearly Mr Damodaran?s real test), the immediate problem of the shortfalls in the two assured returns schemes which matured on June 30 has also been addressed. UTI has also become the first public sector entity to introduce a variable pay structure in its ranks, rewarding the efficient employee for his efforts. It has also set up, for the first time, an asset reconstruction fund for the recovery of its non-performing assets. This internal fund does not collect any monies from the public and therefore does not have to get bogged down by regulations and can smoothly supplement the efforts of the Trust on the recovery front. UTI?s landmark move to keep the books of its MIP-95 scheme open for two more years even after the scheme has matured so that benefits of NPA recoveries are passed on to investors as and when they happen, has just become policy for the mutual fund industry, with Sebi endorsing this and asking all other mutual funds to go the same way. Tribute enough to UTI?s innovative skills.

But despite this lengthy list of pluses, it?s not as if it?s smooth sailing from now on. The worst is clearly over, but now comes the problem of how to tackle the shortfalls in the remaining assured returns schemes and the crucial issue of restructuring UTI itself. The government can either provide a similar guarantee the next time round (after a clear assurance once again that UTI will follow all the conditions), or can ask financial institutions to provide the funds. But whatever the case, once the government has taken the right step of standing by UTI and its millions of investors, something similar can be expected the next time round. On the issue of restructuring, this column had earlier pointed out that privatisation is not a feasible alternative. What is required, now that UTI is gradually getting back on track, is to ask the cash-flush institutions like the Life Insurance Corporation and some others to chip in and set up the asset management company and ensure UTI is run on lines like any other mutual fund. Mr Damodaran and his team at UTI have already proved to the finance ministry that it was not wrong in backing UTI in its time of crisis. UTI?s large family of investors will be hoping that the new finance minister, Mr Jaswant Singh, continues to repose the same faith in the Trust which his predecessor, after some initial reluctance, showed in the institution.