The issue of the MIP shortfalls has assumed critical importance since one of these, MIP-97, is slated for redemption on April 30, and faces a shortfall of over Rs 400 crore. UTI has moved Sebi on the matter, asking it to step in and decide on whether the existing sponsors — Industrial Development Bank of India (IDBI), State Bank of India (SBI), Life Insurance Corporation (LIC) of India and others — will be asked to fund the shortfall in MIPs.
The sponsors have, on the other hand taken the view that they do not have to cough up the amount. While IDBI has taken the view that it is not a sponsor since it bought out the Reserve Bank of India’s (RBI) stake in UTI only in 1976, well after UTI was constituted, SBI has said it was not a sponsor since it had given no guarantees that it would fund shortfalls.
However, UTI has secured legal opinion which says these institutions are, indeed, sponsors of the Trust. Besides, UTI’s view is that since the setting up of the Trust preceded Sebi, one could not strictly go by the 1996 Sebi mutual fund regulations on this issue, since it was impossible for the sponsors to give guarantees at the time because no regulator existed.
This would be a test case for Sebi, since it had in an earlier case — that of Canstar — asked the sponsors to cough up the monies despite the fact that Sebi did not have statutory authority when the scheme was constituted.
However, the expectation from UTI’s side is that as markets regulator, Sebi can take a view on the issue since its role is critical from the point of view of the small investors. MIPs are critical for the small investors since they constitute mostly retired persons, pensioners, widows and the like — people who bank heavily on steady monthly incomes.
While UTI chairman M Damodaran had earlier indicated to FE that if “paternity” of UTI was an issue, and if the existing sponsors backed out, then the government would have to step in, it is not yet clear whether the government would indeed bail UTI out if such a situation arose on the MIP front.
Meanwhile, undeterred by the crisis, UTI has already shot off letters to its 1.5 lakh-odd unit-holders of the MIP-97 scheme, asking them to either redeem their units, or switch over to other UTI schemes. UTI has already decided to launch another monthly income scheme, but without assured returns, to substitute MIP-97, Sebi clearance for which is also awaited. Only existing MIP-97 unitholders can, however, subscribe to this new scheme.
MIP-97 apart, other MIPs which are maturing in 2002 are MIP-97 (II) maturing on June 30, MIP-97 (III) on August 31, MIP-97 (IV) on October 31 and MIP-97 (V) on December 31, 2002.
The UTI board, at its last meeting on April 11, had also debated the role of the existing sponsors, and had felt that in the new recast set-up, the existing sponsors should not continue. This was because of an ostensible conflict of interest since many had their own mutual funds, but also because they had been very reluctant to chip in and fund the shortfalls.