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UTI may face new crisis

The government may have to bail out the country's largest mutual fund operator for a second year running because of a shortfall in the value of guaranteed return schemes, analysts said on Thursday.

They said state-run Unit Trust of India, which stunned investors last year when it froze redemptions from its flagship fund, may now face problems with maturing assured return schemes hit by bad debt and plunging stock markets.

UTI chairman M. Damodaran promised investors they will get their money. "The investor has been given an assurance and that will be honoured," he told Reuters. Finance Minister Yashwant Sinha has delivered a similar pledge.

But analysts are debating whether UTI, which manages nearly half the fund industry's $20 billion of assets, will be able to find the money for the redemptions or whether the government will have to bail out the fund again.

The schemes, favoured by retirees and safe-haven investors, boast returns of 9.25 per cent to 14 per cent -- generous against a backdrop of falling interest rates and a sliding stock market.

UTI's new woes centre around its 16 assured monthly income plans and a fixed-return scheme. Two MIPs and the fixed-return scheme mature on June 30 and three more MIPs mature later this year.

The 16 MIPs offer assured monthly or yearly income for one to seven years, and a few also guarantee repayment of the initial capital at par or the market value, whichever is higher.

POOR INVESTMENTS

But mutual fund tracking companies, which have seen the makeup of Mumbai-based UTI's assured return scheme portfolios, say many of their investments are in doubtful debt.

"These funds invested in poor quality bonds, many of whose issuers turned defaulters. This resulted in unrecoverable credit," Dhirendra Kumar, managing director of fund-tracking firm Value Research, told Reuters. "Adding to their woes has been the slump in the equity markets."

UTI, which declined to comment on its financial situation, created a national uproar less than year ago when it suspended redemptions from its flagship fund, US-64, for the rest of 2001.

It later agreed to redeem US-64 units at a price above the market value, bankrolled by the government. But it set a ceiling on the amount investors could redeem.

UTI has declined to reveal the gap between its combined redemption obligation for the first three schemes maturing and their market value but analysts estimate the shortfall at Rs 6.83 billion to Rs 10.5 billion.

Value Research estimates the total shortfall for UTI's 16 MIPs at more than Rs 35 billion.

Damodaran said UTI can draw on its development reserve fund, worth around Rs 8.5 billion, which consists mainly of fees it takes for managing its 80-odd schemes and some real estate assets.

"As and when these schemes come up for redemption, the DRF will have the money to make good the shortfall," said Damodaran, appointed by the finance ministry after the previous chairman resigned following the US-64 scandal.

REPAY WITH LOANS?

Damodaran would not comment on media reports quoting unnamed government officials as saying UTI might use some of the reserve's assets as collateral for raising loans to meet potential shortfalls for future redemptions in MIPs.

Analysts say between 3.81 and 41.63 per cent of the assets in UTI's various MIPs are "non-performing".

Debt in India "is considerably less safe than in countries with a fast judicial system because bad asset recovery is cumbersome here," said independent financial analyst Devangshu Datta.

While UTI may be able to use the reserve fund to meet redemptions later this month, the reserves may not be sufficient for all its MIPs, analysts say.

"Initial schemes will be honoured and the rest will depend on the markets or possibly on government support," said Sandeep Parwal, director at SPA Capital.

"The government will eventually have to bail out UTI for a variety of reasons, the primary one being the unambiguous guarantee of capital and returns in many cases," said Kumar.

In any event, analysts say UTI should not have promised assured returns.>

"Equity and debt are unpredictable and do not provide a platform for guaranteed returns," Kumar said.

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