That Feeling Of Deja Vu

Written by Sourav Majumdar | Updated: Jan 29 2003, 05:30am hrs
After changes upon changes, were more or less the same... Paul Simon, The Boxer By the end of this week, Unit Trust of India (UTI) will make way for two new entities. One will be a kind of sick bay headed by an administrator with a board of advisors, while the other will be a mutual fund compliant with all norms governing such funds.

There is considerable excitement and frenetic activity these days at UTIs glass-cased headquarters in south Mumbai, as the contours of the makeover emerge. Earlier this month, the four new sponsors of the new UTI Mutual Fund (which will have all the net asset value based schemes) signed on the dotted line and became sponsors in the new set-up. This time, though, there is no Industrial Development Bank of India (IDBI), which wielded considerable clout over UTI in the earlier dispensation. The exit of IDBI, it would seem, has caused much relief to both sides, going by off-the-record conversations I have had with senior officials of both institutions. Not surprising, since both institutions were burdened with their own problems.

The Joint Parliamentary Committee (JPC), in its report, also talks about IDBI dominating the affairs of UTI despite the obvious conflict of interest, since IDBI had started its own mutual fund in 1994. IDBI should have taken the initiative to withdraw itself from control of UTI and its presence on the Board of Trustees of UTI at this stage, the JPC report states. Now IDBIs gone but in the new set-up, UTI Mutual Fund will have as its sponsors Life Insurance Corporation (LIC), State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB). Ironically, all these entities have their own mutual funds. Is it really a recast then

The problem is more acute since three out of four sponsors with the sole exception of LIC are listed entities on the stockmarkets. In fact, they are important banking sector stocks which no fund worth its name can ignore if it wants a well-rounded portfolio. If UTI Mutual decides to aggressively purchase stocks like SBI, PNB or BoB, the market will not view it very well, since these three are also UTI Mutuals sponsor banks. The conflict of interest aspect is all too apparent despite the decision of the government to go ahead with a complex recast of UTI by splitting the organisation.

Take another possibility. Since all these entities have their own mutual funds, which in turn invest in most blue-chips, if UTI Mutual decides to aggressively purchase some stocks which also dominate the portfolios of some of the mutual funds sponsored by UTIs sponsors, then again eyebrows are bound to be raised and questions asked about the sanctity of such investments. This is because aggressive purchases by UTI Mutual may result in propping up the market prices of these blue-chips which, in turn, will bolster the net asset values (NAVs) of the funds sponsored by UTIs sponsor banks. The point, therefore, is, whether or not there is any wrongdoing, questions may still be asked about the sanctity of UTI Mutuals investment decisions either way.

Anticipating this, the JPC has, commenting on UTI, pointed out in the section Future Role that the institutions chosen to sponsor UTI should be those that have not sponsored their own mutual funds. It has even said that in case this is not found feasible, the government should spell out in detail both through legislation and through policy guidelines as to how it proposes to insulate UTI-II from the inherent conflict of interest as regards these institutions. If the government is serious about restoring UTIs credibility through the newly formed UTI Mutual Fund, it should immediately address the issue of conflict of interest. The sponsors should also look for ways to address this problem if they are serious about UTI Mutual. Otherwise, the government would be better off bringing in other sponsors in the form of banks or institutions which dont come with excess baggage in the form of their own funds.