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UTI sponsors spurn govt feelers on bailout

Tamal Bandyopadhyay

The Industrial Development Bank of India, the State Bank of India and the Life Insurance Corporation have made it clear to the finance ministry that they are not willing to play the role of 'sponsors' to the Unit Trust of India, in any form.

However, both SBI and LIC have said they are willing to extend loans to the beleaguered mutual fund on a 'purely commercial basis' to tide over redemption pressures.

The three institutions collectively hold 80 per cent of UTI's initial equity corpus of Rs 50 million.

The finance ministry has held a series of meetings to try and persuade the three institutions to stay with UTI as sponsors and make good the shortfall in its assured-return schemes.

"We have made it clear that we cannot be termed as sponsors and there is no confusion about it in any quarters. However, we will be always ready to extend loans to UTI based on appropriate collateral," a source said.

The State Bank of India had last year extended loans to the mutual fund to meet the redemption pressure.

The three institutions have refused to accept the responsibility of sponsorship even though they contributed to the equity corpus when UTI was set up under an Act of Parliament.

Besides, all the three have their own mutual funds and they are not willing to be the sponsors of another.

UTI has been insisting that they are sponsors under Section 2X of the Mutual Fund Regulations, 1996, of the Securities and Exchange Board of India, which defines a sponsor as "any person who, acting alone or in combination with another body corporate, establishes a mutual fund."

However, Sebi has not taken any decision on the status of the three institutions.

It has asked UTI to make good the shortfall in its assured-return schemes from its development reserve fund for the time being while the finance ministry is working overtime to find a long-term solution.

Sources said IDBI might find it difficult to wriggle out of sponsorship because it has played an active role in running UTI.

"If IDBI is unable to get out of the UTI sponsorship, the government may pump money into IDBI to help UTI meet its liability since IDBI is not in the best of health," said a source in Delhi.

When Canara Bank was forced to bear the Canstar liability, the government pumped Rs 6.50 billion into Canara Bank," said a source in Delhi.

However, the situation now is different and both SBI and IDBI are listed companies, answerable to their shareholders. "It will be difficult for the ministry to force them to play the role of sponsors," sources pointed out.

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