UTI Prepares For A New Future

Updated: Jan 28 2003, 05:30am hrs
US-64 Units To Be 5-yr Tax-free Bonds
Our Markets Bureau
Mumbai, January 27: In a major step to extend the longevity of Unit Trust of Indias (UTI) US-64 scheme, the government has decided that US-64 units issued on or before June 30, 2001 either held by original unitholders or by buyers of these units in the secondary market would be treated as five-year, tax-free, tradeable bonds with effect from June 1, 2003.

In a notice to members, the National Stock Exchange (NSE) made this change public on Monday, a day before trading in US-64 units is to resume. The bonds will mature on May 31, 2008, and bondholders would be paid interest on their holding at such rate and frequency (i.e., half-yearly, yearly) which would be announced later, the NSE notice said. However, the existing special price repurchase (SPR)/net asset value (NAV)-based repurchase facility for unitholders in below 5000 units/above 5000 unit categories respectively, will continue.

The US-64 scheme will be housed in UTI-I from February 1, 2003, the day from which UTI will be split into UTI-I and UTI AMC, the two separate entities, following the repeal of the UTI Act 1963. The US-64 scheme has a corpus of close to Rs 10,500 crore. FE had reported on January 13 that there is a likelihood of further sops being announced to get investors to stay on in the US-64 scheme beyond May 2003.

This crucial change is essentially aimed at minimising the repurchase pressure on UTI when the SPR schemes come up for maturity in May 2003. By converting US-64 units themselves into five-year, tax-free bonds which will also bear interest, the government has effectively sought to tell the investor that he should hold to those units for tax breaks also.

Commenting on the move, a senior UTI official told FE:We believe this will make investors stick with the scheme. This is because not only is there a tax rebate, he also gets tax-free interest on these bonds.

Earlier, the government and UTI had worked out yet another modification in the US-64 scheme which now allows investors who have picked up units issued on or before June 30, 2001 including those purchased from the market to avail of the SPR price. The SPR price for those holding over 5000 units is Rs 10 in May 2003. For those holding up to 5000 units, the price will stand at Rs 12 in May according to a graded repurchase scheme where the repurchase price increases by 10 paise each month, terminating in May.

The important change which these initiatives has resulted in, is that the benefits have now been transferred from the unitholder to the instrument itself. In effect, the secondary market will now have three sets of US-64 prices. The first set will be for those units which are in the below 5000 category, and eligible for SPR of Rs 12 in May. The second would be in the over 5000 category, eligible for SPR of Rs 10 in May. The third category would be those which are not under the two categories mentioned above. In each category, the market price is expected to reflect the category under which the unit falls.

If an investor does not want to opt for the SPR window, he now has the option of selling the units (whichever category it falls under) in the market. The market will be attractive in case the market price is higher than the current SPR price. For example, if an investor who has over 5000 units cannot wait till May 2003 for the Rs 10 repurchase price, he can now sell the units in the market. The buyer, on the hand, will be someone who pays a higher price than the current NAV as he will be assured of Rs 10 per unit if he waits till May. This will result in a market for such units.

Alongside this, the tax break now announced will go a long way in ensuring that the buyer of units from the market also do not rush to the repurchase window in May because it has now become worthwhile for him to hold on for the tax and interest benefits.

Trustees, AMC Meet For First Time Today
Sourav Majumdar

Mumbai, January 27: The crucial issue of whether UTI-Is assets would be managed by UTI Mutual Fund, generally known as UTI-II, would figure prominently in the discussions when the first meetings of UTI MFs board of trustees and the board of the asset management company take place on Tuesday, days before the formal split of UTI becomes effective.

The meetings of the boards of UTI Trustee Company Pvt Ltd and UTI AMC Pvt Ltd would be followed by another important meeting that of the five-member advisory board of UTI-I, on Wednesday, January 29. From February 1 onwards, UTI-I will house US-64 and all assured return schemes, while UTI Mutual Fund will have all net asset value-related schemes of the former UTI.

UTI Mutual may manage UTI-I assets for a fee under the new dispensation, and the two sides will deliberate on this aspect before arriving at a decision. UTI Mutual will first have to decide whether it will manage the funds of UTI-I, and the advisory board of the latter will take a view about whether to allow UTI MF to do it or have its own internal fund managers. The UTI prefix will now go to UTI Mutual Fund, which will have about Rs 15,000 crore of assets under management.

Tuesdays meeting of UTI Mutual Funds trustee and AMC boards will also be the first major interaction on this front after the signing agreement of the sponsors on January 15. Life Insurance Corporation (LIC), State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB) are the four sponsors of UTI Mutual Fund, with 25 per cent each in the AMC.

The chief executive officer of UTI AMC, who will actually be the man in day to day charge of the fund house, is also expected to be named on Tuesday. UTI chairman M Damodaran, who is the administrator of UTI-I, is also expected to be named UTI Mutuals CEO. Mr Damodaran is also on the UTI AMC board as a BoB nominee, along with SBI nominee BD Sumitra, LIC nominee SH Bhojani and PNB nominee JS Mathur. The board meeting of the AMC is expected to finalise arrangements relating to the continuity of all existing arrangements, including those with service providers and custodians, for the sake of a smooth transition. The board of trustees comprises C Ramachandran, Dr Pritam Singh, ID Agarwal, Kanta Ahuja and MP Radhakrishnan.

The Wednesday meeting of the UTI-I advisory board will need to assign a name to what is commonly being called UTI-I. Administrator M Damodaran apart, the advisory board consists of UK Sinha, joint secretary, capital markets, in the finance ministry, D Swarup, additional secretary (Budget) in the finance ministry, banking expert MG Bhide and finance expert AN Shanbhag.

There are two views currently on whether UTI MF should manage UTI-Is assets. While the Joint Parliamentary Committee (JPC) has also recommended this line, and it makes sense from the point of view of synergies, the counter view is that it may be seen as going against the very rationale on which UTI was split in the first place. If the idea of the split was to ringfence the UTI-I problem of US-64 and assured return schemes, then having a common arrangement for managing UTI-Is funds may send confusing signals to some, sources said. In that case, UTI-I would need to appoint fund managers. But even in that case, the dealing room and other infrastructure support would be provided by UTI Mutual Fund.