[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
APPENDIX
A.1 UTI Crisis
The section is compiled from the www.
rediff.com archives. UTI mutual fund
commenced operation on July 1964. It
was established by the central government
to channel community savings into
productive uses in order to speed up industrial
growth. To quote then Finance
Minister T.T. Krishnamachari “the trust
would be open to any person or institutions
to purchase the units offered by the
trust. However, this institution as we see
it, is intended to cater to the needs of individual
investors, and even among them
as far as possible, to those whose means
are small.” The main objective of the
UTI was to invest retail savings in the
capital market and pass the benefits back
to small investors. UTI had a monopoly
in the funds industry until 1986. Subsequently,
PSBs sponsored funds entered
the market and in 1993 there were 8 mutual
funds. After 1993 private sector mutual
funds were allowed. The funds industry
has grown at a compounded
average rate of 27 percent from an asset
base of Rs.250 million in 1964 to its current
size of Rs.900 billion. The share of
UTI is around Rs.600 billion. UTI invests
about a quarter of this through the
US-64 fund, India’s largest, and accounts
for about 15 percent of the domestic mutual
fund industry’s assets in a year. The
mutual funds (particularly UTI) are very
popular among small investors and became
even more attractive in 1996 when
the mutual fund dividend returned by
equity-oriented schemes was exempted
from tax. In mid 2002, the UTI bank decided
to skip a dividend for its flagship
US-64 scheme for the year 2001-02. This
was because the NAV of the scheme had
eroded sharply and was much lower than
its face value of Rs.10. On 1st August,
2002 the NAV of US-64 was Rs.5.80.
This was the first time the UTI had
skipped paying a dividend for the US-64
scheme, since its inception in 1964. The
UTI Board decided to skip a dividend as
the government had been providing budgetary
support to unit holders, to bridge
the gap between the NAV and repurchase
price of 2001. In the period January-June
2002 the SEBI reported that the UTI had
redemption/repurchase to the tune of
over Rs.63 billion against a mobilization
of just Rs.6.3 billion. All the Minimum
Income Plan (MIP) schemes of the UTI
showed negative reserves on 30 June
2002. According to a report by SEBI, 35
out of 63 schemes (whose unaudited results
were available) had negative reserves.
For the MIP schemes, negative
reserves totalled up to Rs.30 billion.
MIP97(III) had egative reserves of
Rs.2.6 billion and MIP97(IV) had negative
reserves of Rs.2.5 billion. For the
three years between 1999 and 2002, UTI
consistently lost market share in terms of
net assets. On 31 March 1999, UTI had
a 77 percent market share with assets at
Rs.531.45 billion out of total Rs.681.93
billion. These figures dropped dramatically
over the following years and on 30
June 2002 the market share of UTI was
46 percent with assets amounting to
Rs.463.96 billion out of total Rs.1007.03
billion. UTI’s investments make up 11
percent of the value of all stocks traded
on the Bombay Stock Exchange.
The collapse of UTI began in 1999.
The UTI mutual fund scheme was ailing,
the government had issued a Special Securities
Scheme for Rs.33 billion by taking
over a large percentage of public sector
scrips which had a considerably lower
book value. The government continued
to pay interest of 11.2 percent to the trust
until 2002. UTI had not paid any dividend
to the government until then. However,
things did not turn out as planned
and due to harsh market conditions, especially
with the tech meltdown, US- 64
holdings fell by Rs.10 billion during January
to November 2001. The problem
was aggravated because unlike most open
ended schemes US-64 did not declare its
NAV on a daily basis. In 2001-02, the
government provided a cash support of
Rs.3 billion to US-64 following the sudden
freezing of sale and repurchase of
units on 2nd July 2001. In 2002, the central
government doled out Rs.5 billion
and promised another Rs.5 billion for the
US-64 scheme to meet the difference between
its net assets value and the administered
repurchase price. The government
planned to work out a tax concession
package to enthuse investors to remain
with the scheme after May 2003. A committee
was set up to investigate the matter
and make recommendations. The
committee revealed certain weaknesses
in investments made by UTI.
These were:
• Bad investments, including in firms it
had been warned against investing in
by its own internal advisory team. For
example, UTI lost Rs 328 million investing
in an Internet company against
the advice of their own
research department.
• All 19 individual investment decisions
THE INDIA ECONOMY REVIEW
129