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Budgetary support for UTI likely

P Vaidyanathan Iyer & Subhomoy Bhattacharjee in New Delhi

The government is planning direct budgetary support to the Unit Trust of India, which faced a shortfall of Rs 81.89 billion on its assured-return schemes as on January 31, 2002. The other option being evaluated is compensating the sponsors.

While the restructuring plan and bailout decision would be hammered out by a group of ministers (GoM) constituted recently, finance ministry officials said a bailout was inevitable.

So far, except for the US-64 scheme, where the Centre restricted itself to paying just the difference between the net asset value and the committed repurchase price, the finance ministry had refrained from promising any cash support to the mutual fund. But on US-64 alone, the government is likely to take a hit of Rs 50 billion.

The setting up of the GoM - comprising Finance Minister Jaswant Singh, Planning Commission deputy chairman KC Pant and Divestment Minister Arun Shourie - was more of a political decision to reach a consensus on the revamp of the financial institutions, IFCI and IDBI and UTI, officials said.

While the Life Insurance Corporation and PricewaterhouseCoopers have already submitted concept papers on the restructuring of UTI, officials said the main issue was whether the initial equity contributors, IDBI (50 per cent), SBI (15 per cent) and LIC (15 per cent), should be considered sponsors and hence made to pay the shortfall on the assured-return schemes. Interestingly, the Securities and Exchange Board of India, which was asked by the finance ministry over two months ago to give its views on the issue, is yet to respond.

Officials said the main hurdle in declaring the initial contributors as sponsors and asking them to make good the shortfall on UTI's monthly income plans, was the fact that UTI was a creation of Parliament. "Unless the UTI Act is repealed and a three-tier structure put in place, it will be difficult to name the equity contributors as sponsors," said an official. "How and when the UTI Act will be repealed is still being discussed."

The Rs 10-billion guarantee the Centre provided UTI with for its borrowings would take care of the latter's liquidity needs till August 31. "The next liability falls only in October end," said an official, adding, the government would by then firm up a plan for all redemptions of UTI's assured-return schemes. They said the huge bailout would best be handled by a committee like a group of ministers.

But sources said the process would almost certainly push the time-table for the repeal of the UTI Act beyond December 2002, which had been promised by the former finance minister. This is because the ministerial group would like to consider the issue afresh.

The MIPs, which in certain cases even offer protection to the capital in addition to an assured return, mature in the next three years. Some of the assured-return schemes, however, have a much longer tenure of 10-20 years.

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