M A I N   N E W S

Bail-out package for UTI
Move to restore investor confidence
Tribune News Service

New Delhi, August 31
In a major initiative at restoring investor confidence in the beleagured Unit Trust of India (UTI), the Centre today announced a number of measures involving injection of funds to the tune of Rs 14,561 crore, bifurcating the mutual fund and repealing of the UTI Act through an Ordinance.

Speaking to newspersons after a crucial meeting of the Cabinet Committee on Economic Affairs (CCEA), Finance Minister Jaswant Singh said the bail-out package would enable the country’s largest mutual fund to honour all redemptions entailing various assured return and NAV-based schemes.

The Finance Minister said the government would also consider continuation of the existing tax incentives to the 20 million unit holders beyond the earlier announced time frame of May 2003. The measure is seen as an effort to woo the investors to remain with the fund for a longer period of time and minimise a possible spurt of sudden redemptions in the short term.

Mr Jaswant Singh said a bail-out package for the Industrial Financial Corporation of India (IFCI) and Industrial Development Bank of India (IDBI) would also be announced soon.

Finance Secretary S Narayan said the value of the UTI’s assets as on June 30 stood at Rs 42,000 crore, of which Rs 17,784 crore was the market value of the assets in NAV-based schemes and the remaining Rs 24,215 crore was on account of the US-64 and assured return schemes. At present, the shortfall with respect to the Assured Return Scheme is estimated at Rs 8,561 crore.

As regards bifurcating the UTI, the Finance Minister said, “the UTI would be divided into two parts. The UTI-I will be the old protected UTI comprising US-64 for which assured repurchase prices and assured return schemes have been announced. The UTI - II (the new UTI) will comprise all net asset value-based schemes”.

The UTI -II, which will be privatised in due course, will have a professional Chairman and Board of Trustees. The Finance Minister, however, declined to set a time frame for privatising the newly hived off arm of the UTI.

The Finance Minister said the government would meet its obligation to bridge any deficit in the UTI - I (the old UTI managing assured return schemes). It would be managed by a government-appointed administrator and a team of advisers nominated by the government.

“We will be alert and as far the UTI-II is concerned, we will run it on professional lines”, Mr Jaswant Singh said, adding that the future course of the UTI-II would depend on the recommendations of professionals.

He did not agree to the argument that the bail-out package would have an adversary budgetary impact even as he indicated that the fiscal burden could come under stress because of an increasing public debt.

The Finance Minister said no cash transactions would be involved and a sum of Rs 1,000 crore had already been pumped in for the US-64 and other assured return schemes, while the remaining Rs 5,000 crore would be arranged.

“The objective will also be to create a market and reduce redemption”, he said. The CCEA also approved the revision of fixed coupon rate of 10 per cent and extended the tenure of the recapitalisation bonds, worth over Rs 5,000 crore, issued to public sector banks.

The tenure has been converted to “perpetuity” from the existing 12-year-period and has also been made non-transferable.

Under the revised format, which was announced today, the coupon rate on these bonds issued to public sector banks would be linked to the yield on 364-day Treasury Bills, with additional 1 per cent over the average yield on these bills.

The government had issued these bonds with a 10 per cent interest to increase the capital base of nationalised banks.

Mr Jaswant Singh said these bonds would be redeemable only as and when the bank returned the capital as part of the banks’ restructuring programme. The bonds, which were earlier treated as Tier-II capital, can now be treated as permanent Tier-I capital of equities and reserves.

Salient features

• Promulgate an ordinance scrapping the UTI Act, paving the way for bifurcation of the largest mutual fund
• Bifurcate the UTI into UTI-I and UTI-II
• Taking control of UTI-I by the government
• Giving control of UTI-II to professionals for the time-being
• UTI-I will handle US-64 and 21 other assured return schemes and the government will continue to provide support to the fund subscribed by small investors, including pensioners and the salaried class
• UTI-II will handle all net-asset value schemes and the government will not provide any support to the fund. The fund will also be placed under SEBI scrutiny like other mutual funds
• Eventually the UTI-II will be privatised.