August 5, 2002 | 1800 IST
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Money > Business Headlines > Special August 5, 2002 | 1800 IST |
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How many more bailouts for the UTI?Salil Panchal/ Morpheus Inc The hen that lays golden eggs should be guarded with one's life. That, we know. But what if she starts producing cloudy and putrid eggs? Worse, what if the costs of keeping her alive are much higher than the returns? Well, this is not just a poor farmer's tale. This is the story of our very own government's woes to keep the country's largest and once upon a time favourite mutual fund, the Unit Trust of India, afloat. Fears that its end may not be so pleasant afterall are now beginning to do the rounds. A small bailout On July 30, the government announced a Rs 5 billion-bailout package for the UTI as part of the Rs 80.07 billion-supplementary demands for grants for this financial year. This current bailout money provided for UTI is to meet the shortfall between the assured repurchase price and net asset value of its flagship scheme, US-64. The US-64 scheme moved to the NAV basis on January 1, 2002. The Rs 80 billion would be used for redemption of various schemes, including Monthly Income Plan-97-II, which is maturing on August 31. Minister of State for Finance Gingee Ramachandran, introducing the first batch of supplementary demands for grants in the Lok Sabha, had said it would involve a cash outgo of Rs 39.13 billion. This additional expenditure is being matched through savings by concerned departments and enhanced receipts and recovery for Rs 40.94 billion. ... and inherent problems are huge Financial experts are of the view that the Rs 5 billion-bailout will actually do little for the UTI. The complete picture reveals that there are now several issues which need redressal at the UTI's end. The bailout scenario does not end here. Huge funding and restructuring towards the MIP schemes remains. According to unaudited results, all of UTI's MIP schemes show negative reserves in the January-June 2002 period. Huge restructuring of its MIP portfolios is required. UTI witnessed a further outflow of Rs 57 billion in the January-June 2002 period as other mutual funds witnessed average growth. Concerns over investment decisions, professional fund management and autonomy remain. Investor confidence in UTI continues to erode. UTI's share (assets under management) in the entire mutual fund industry stands at 46 per cent only in July 2002 against 77 per cent in March 1999. Where it all started Nearly three years ago, one would recollect that the government pumped in Rs 33 billion into the then ailing US-64 scheme. At that time, the government picked up some select PSU stocks in the US-64 portfolio and the UTI, in turn, reinvested the sum earned in government securities. Bearish market conditions and the huge tech meltdown however ruined the strategy and the US-64 holdings dipped by Rs 10 billion in the January-November 2001 period. The problems at that point of time were compounded by the fact that unlike most existing open-ended schemes, the US-64 did not declare its NAV on a daily basis and was not marked to the market. The US-64 fiasco led to a huge dig up. The Tarapore Committee, set up to investigate into the business operations and make recommendations, revealed that there were several inconsistencies linked to investments. Often investments were made in companies, which UTI's own internal research team had ruled against (Cyberspace Infosys). In some cases, investments in companies were increased after the erosion in share prices. Further, the committee ruled that all the 19 individual investment decisions of the Trust were imprudent and actually turned out to be wrong. The 2001 stock scam finally brought to light the ugly nexus of the UTI (and possibly other MFs) with local operators and promoters/corporates. The mutual fund is believed to have been the backbone for huge purchases in the infotech sector, supported by local operator Ketan Parekh. The tech meltdown only resulted in sharp redemptions for the scheme earlier this year. The delay in the government's PSU divestment program at that point in time also impacted the PSU holdings within the US-64 scheme. MIP schemes still fall short In the weakening equity market conditions, as investors pulled out of their MF investments, the UTI faced huge redemption pressures. This put pressure on most of their earlier monthly income plans which were structured to function as assured return schemes. UTI had run into problems with its full term assured return MIP schemes, because the rates of returns that it had offered on these schemes were higher than the prevailing rates on its investments. As a result, it has a redemption problem, which it cannot meet even from its Development Reserve Fund. According to an estimate prepared by UTI, the total shortfall in its 11 MIP schemes, maturing between April 30, 2002 and May 31, 2004, works out to Rs 33.88 billion. As seen with the US-64 scheme, the DRF would have to be tapped to assure returns. But in case of the MIPs, the shortfall of funds is too huge to be met by the DRF and a bailout package would have to be worked out by the government or promoters IDBI, SBI and LIC. So what does the current bailout mean? Nothing at all. Most financial market experts are bewildered by the overall bailout plan. ``I don't know how far the government can go on like this. We have seen previous experiences with UCO Bank and Indian bank. The financial strength of some of our financial institutions like IFCI and ICICI is not too much to speak of. The concern is, will this all ever end?'' an investment advisor with a domestic financial institution said on condition of anonymity. An India country head with a foreign institutional investor research outfit said, "The biggest problem is who really pays for the bailout. The retail investor gets affected each time the government's spending increases and the general public also suffers through higher taxes. And it is not that UTI or the finance ministry has learnt from its lessons. Internal functioning does not change with a bailout.'' One may ask: is there an alternative to the bailout? Sadly, in the current environment, the bailout of UTI is not just a financial or economic decision. It is a political decision too. And the government has already faced several embarrassing questions linked to the price rigging in 1998, stocks scam in 2001, low FII outflows and poor investor confidence. Why the UTI decided to skip dividend In mid-2002, the UTI decided to skip dividend for its flagship US-64 scheme for the year 2001-02. This was particularly in the view that the NAV of the scheme had eroded sharply and was much lower than the face value of Rs 10. The latest US-64 NAV is 5.80 on August 1, 2002. This is the first time that the UTI has skipped dividend for the US-64 scheme since its inception in 1964. The UTI board decided to skip dividend as the government has been providing budgetary support to unitholders to the extent of the gap between the NAV and the repurchase price decided last year. However harsh it may seem for investors and die-hard UTI fans, the skipping of dividend for US-64 should be seen as a prudent decision. In the current scenario, it will prevent further bleeding of the UTI. Last year, UTI announced its special liquidity package providing repurchase facility. This special repurchase package allowed investors to redeem up to 3,000 units. That has now been increased to 5,000 units. This assured repurchase price for 5,000 units began at Rs10, which will increase by 10 paise every month, to reach Rs 12 in May 2003. For holdings above 5,000 units, UTI has assured a repurchase at Rs 10 per unit or at NAV, whichever is higher on May 31, 2003. The government under a special package will meet the gap between the NAV and the assured price. Even while the overall investment climate--particularly for equities-- remains weak, the scenario for UTI appears to be a matter of concern. UTI lags behind in the mutual fund classroom Even while looking at the bailouts and restructuring plans, in terms of performance, the UTI is lagging behind in the MF classroom. In the January-June 2002 period, the Securities and Exchange Board of India figures show that the UTI has faced redemptions/repurchases to the tune of over Rs 63 billion against a mobilisation of just Rs 6.5 billion. This has in fact ruined the overall result sheet for the mutual fund industry with overall outflows to the tune of Rs 8.32 billion. Recent media reports state that all the MIP schemes of UTI showed negative reserves as on June 30, 2002. According to a report, 35 of the 63 schemes (whose unaudited results were available), had negative reserves and for the MIP schemes this totals to over Rs 30 billion. MIP 97 (III) has negative reserves of Rs 2.6 billion and MIP 97 (IV) has negative reserves of Rs 2.5 billion. What is even more worrisome is that over the past three years, UTI has consistently lost market share in terms of net assets under management. On March 31, 1999 UTI commanded a 77 per cent market share with assets at Rs 531.45 billion out of Rs 681.93 billion. This has fallen sharply to a 46 per cent share with assets at Rs 463.96 billion out of Rs 1007.03 billion on June 30, 2002. Even if we were to consider that private sector funds have increased its investments (and business reach), the UTI has still seen an erosion of assets to the tune of nearly 13 per cent in this period.
The new restructuring plan The Tarapore Committee issued various recommendations which would spill from the US-64 scheme to the overall functioning of the mutual fund. The basic ones include setting up of AMCs for specific schemes, introducing performance-linked fund management, delinking the trust with the AMC and finding a strategic partner for the UTI. The Malegam Committee, which was formed by the board of trustees of UTI, at the instance of the government had recommended to rope in a strategic partner by offering 60 per cent of the share capital of the sponsoring company. The decision to skip dividend and lower assured returns for key schemes has been seen for the first time ever. It is necessary and wise at this stage. In earlier years, the UTI merely thought of maintaining its stranglehold on the industry and to retain investors by providing constant income/dividend to investors on one hand and to `artificially' support the equity markets. This is where bad investment decisions and undue pressure on the DRF affected the UTI. The move to gradually link the new sales of US-64 to the actual NAV by 2003 is also well accepted. Internally, it has decided to incorporate professionals on its board and to create entities in the Trust, which will be looking after investments on a continuous basis. Who can bailout UTI? The burden for a UTI bailout will come onto its promoters SBI, IDBI, LIC. The government, through the finance ministry and in conjunction with the RBI and Sebi, will decide on the process for the bailout. In the current scenario, analysts say that the gauntlet would fall on SBI and possibly IDBI. SBI enjoys a dominant position in the Indian banking sector. With an asset size of $73.3 billion, the bank has remained an undisputed leader in most of the segments it operates in- be it forex transactions, cash management and corporate lending. The bank has, of late, become a dominant player in the retail loans market and now enjoys a formidable position in the housing finance industry. According to a recent Enam Financials research report, the bank has made considerable progress in improving its operational efficiency. The recent VRS scheme has helped the bank improve its cost-income ratio and has positively impacted the overall margin of the bank "Current valuations of the stock at 3.8x FY 2003E earnings and 0.7x FY 2003 BV do not seem to reflect the incremental profit on consolidation of its associate banks and subsidiaries. SBI has remained a highly profitable bank with net profit this year likely to touch Rs 26 billion this fiscal. The bank's ROE for FY 2002 will be close to 17 per cent. The bank has shown a CAGR of 14 per cent in its net income in the last five years. Net income is likely to grow at a CAGR of around 13.5 per cent in the next two years,'' the report says. Two leading investment banks and brokerage houses have rated SBI as a `buy' investment. In conclusion The darkest concerns for UTI remains in terms of how much pressure will be put on its promoters and other banks for the bailout program. With the MIP problems continuing and large negative reserves, a portfolio restructuring would be necessary. But unlike previous years, it will have to be prudent in long-term investment-decision making. However, the clean-up will have to trickle down to the fund managers and all investment advisory officials. The strategic partner, would improve the outlook and foreign investor response towards UTI, but not its performance. The current internal restructuring going on at the UTI is an effort to ensure that the government's influence over the UTI diminishes in coming years. The political and financial market influences may never allow this to happen. But what the government has to understand is that each time the UTI fails in its purpose, it weakens the structure for the equity markets and particularly the mutual fund industry. Sebi, which has itself maintained an arms-length from the UTI, will have to tighten its belt and bring the giant to book, whenever necessary.
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