Reflections Of A UTI Founding Father

Updated: Oct 30 2002, 05:30am hrs
The Unit Trust of India (UTI) has been in a cauldron with widespread distress among the mass of investors. A number of committees have been commissioned to look into specific issues and a Joint Parliamentary Committee is also seized of the matter. The present top management of UTI has made tremendous efforts to keep the UTI ship on an even keel and the government has come up with a comprehensive, albeit expensive, bailout package.

UTI was set up in 1964 and most of the key decision makers of the time are no more. The UBS Publishers Distributors have just published a book by Vishwanath Gopal Pendharkar on Unit Trust of India: Retrospect and Prospect (2002). Who was V G Pendharkar and why is this book of great significance Mr V G Pendharkar, 87 years of age, was one of the founding fathers of UTI. He was UTIs first Executive Trustee. Although Mr Pendharkar retired as Executive Director of the Reserve Bank of India (RBI) as far back as 1972, he has continued to be a keen analyst of UTI. In many ways, this book is unique in that it not only provides an insight into the thinking at the time UTI was set up but also provides an incisive assessment of developments over the past 40 years.

While the question of investment trusts was examined by the Central Banking Enquiry Committee (1929) and the A D Shroff Committee on Finance for the Private Sector (1954), and the matter was being examined by the RBI in the early 1960s, the news that Pakistan was about to set up a Unit Trust provided strong acceleration toward actualising the proposal. The then Economic Department of the RBI had already done considerable work and this greatly facilitated the conceptualisation of UTI. The proposal for setting up UTI gathered momentum as T T Krishnammachari (TTK) was a strong supporter. The initial work for a draft Bill was undertaken in the RBI by a small group of which Mr Pendharkar was a member.

The World Bank offered assistance in the form of an expert, viz Sullivan, who was broadly in agreement with the RBI draft but made two vital changes which were incorporated in the final Bill, and these amendments are of great significance to the developments of 2001. First, Sullivan suggested that the US-64 scheme should not be restricted to individuals (Pendharkar was then unconvinced of the merit of this suggestion). Second, Sullivan suggested that there should be provisions for the UTI to suspend its repurchase obligations in an emergency. Both these suggestions were incorporated and had important bearings on the crisis of 2001.

While under the draft Bill the power to appoint Chairman was to rest with the RBI, the government, while finalising the Bill, gave this power to the government in consultation with the RBI this was the origin of the covert influence of government over UTI. It is to the credit of the first Chairman of UTI, Mr R S Bhatt, that he did not respond to TTKs suggestions that UTI buy the shares in a particular company. It is important to note that the initial Act provided for the RBI to give directions to UTI but for UTI to be under the disciplinary control of government. All this changed in the 1970s when the RBI was distanced from UTI and as such, the chaotic situation arose of UTI being regulated neither by RBI nor by any other regulator.

It is clear from Pendharkars summary of the debate on UTI in Parliament that there was great emphasis on the small investor an objective that got lost along the way. TTK had then assured that the government would not interfere with UTIs investments and that it would be supervised by RBI.

Looking in retrospect at the handling of the net asset value (NAV) and the repurchase price, Pendharkar rightly attributes the problem of latter years to the assurance that the repurchase price would not be below Rs 10. In June 1965, the stipulation of sale and repurchase at NAV-based prices was altered to allow UTI to deviate from NAV. Once again, this resulted in a major problem in more recent years. As Pendharkar puts it, the pricing policy of UTI generated the false belief that unit prices could only go up living in a kind of fools paradise as Pendharkar calls it. It was precisely the off-NAV pricing which caused the crisis of 2001. Pendharkar goes on to raise the question whether the pricing policy amounted to a breach of law.

Pendharkar questions the dividend and reserves policy of the UTI. While he feels that building of reserves is redundant, what was reprehensible was that the purchase/repurchase price did not reflect the NAV. Hence, there was inter-temporal injustice to buyers and sellers of units at different points of time.

Pendharkar does not merely delve into history but also has valuable comments on the current debate on the restructuring of UTI. He feels that if the Deepak Parekh Committee had recommended an immediate move to NAV for US-64, the contretemps of 2001 could have been avoided. He also feels that US-64 is still a large scheme with serious problems and it would be best if a separate Asset Management Committee is set up for it.

Pendharkar is not enamoured by the recommendation of various committees on restructuring UTI. While recognising that central banking purists will not agree to his suggestions, he nevertheless advocates that the RBI should be the sole sponsor of UTI. Pendharkar is not for repealing the UTI Act and he feels that it would be best to amend the present Act and that the image in the public mind of UTI being a statutory corporation should be retained.

One may have differences with Pendharkar on certain details but the central issue is that his book will become the locus classicus on UTI. Nowhere else does one get a broad sweep of the genesis as well as an analysis of the present problems. The book should be mandatory reading for all concerned UTI officials, the sponsor institutions, the government, RBI, industry, academics and the media. Moreover, this is a book which interests the common investor in UTI. The large body of UTI investors owe a sense of gratitude to Pendharkar for his monumental work.