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UTI: Saving a leviathan

BS Tamal Bandopadhyay

It is a startling contrast that couldn't be missed. On July 1, 2001, pandemonium broke loose when the Unit Trust of India announced that sales and repurchases of its flagship scheme US-64 were being frozen.

Forty-eight hours later, UTI's chairman P S Subramanyam, who was blamed for the imbroglio, was unceremoniously sacked.

Almost exactly a year, later UTI is still neck-deep in financial difficulties. After a marathon meeting on June 27, the new Chairman M Damodaran announced that US-64, UTI's flagship scheme would, for the first time in its history, be skipping its dividend for the year.

Damodaran, who joined UTI in August last year on a one-year term, is slated to get a two-year extension.

Why is the Finance Ministry meting out such different treatment to the two UTI chiefs? Why is Subramanyam projected as the villain and Damodaran as the hero?

Says a senior finance ministry bureaucrat: "Last year, the freezing of the sales and repurchases of US-64 was a shock to the 20 million investors as they were all along kept in the dark. This time, the skipping of dividend is a recognition of the reality from which there is no escape, however unpalatable it may be."

It has been a traumatic year for UTI. Over the last few months all the skeletons have come tumbling out of the closet and the public has been shocked by revelations about wrong decisions and mismanagement of funds.

But, at the same time, the opaque walls of the UTI are crumbling and that has been for the better. A new UTI is emerging from the rubble, ironically at a time when its parents (read sponsors) are fighting it out with the Securities and Exchange Board of India and the government to disown their offspring.

Is Damodaran the right medicine-man for the country's largest mutual fund? Opinions differ: disgruntled insiders describe him as a "bureaucrat with a broom"; excited in-house fund mangers praise his style of functioning because he gives them freedom to build portfolios and trade in equities.

The finance ministry shows no sign of regretting its choice. Meanwhile, the investing community has accepted the current state of affairs at UTI because nothing could be worse than this.

Is UTI - once considered the safest bet for small investors and corporates - rotten to the core? Let's look at the darker side of the fact sheet first:

• The Trust's assets under management have shrunk to a five-year low. Its market share, which once hovered at around 85 per cent, has come down to around 50 per cent. The total investible fund has fallen to Rs 487.06 billion in May 2002 from Rs 55.202 billion in June 2001. During this time, the US-64 corpus has shrunk from Rs 164.32 billion to Rs 123.30 billion.
• Gross non-performing assets in corporate debt is around Rs 68 billion or 33 per cent of its total debt portfolio. There's also a pile of illiquid stocks in its equity schemes.
• The US-64 scheme alone has borrowed Rs 31.85 billion from the banks to meet redemption pressures. Then, there is another Rs 50 billion borrowed from various other in-house schemes. This apart, the government is supporting the fund to bridge the gap between the net asset value and the promised return on the limited redemptions of the US-64 units. So far, about Rs 3 billion has been reimbursed by the government on this account.
• The Development Reserve Fund of the Trust, which is the cash reserve to meet shortfalls in its assured return schemes, is shrinking fast. The DRF corpus is now pegged at around Rs 9.50 billion after UTI drew Rs 6.17 billion to meet the shortfall in one of its monthly income plans - MIP-97 - on April 30.
• MIP-97 is one of the many assured return schemes that will continue to mature till March 2006. These schemes could bleed UTI to death if the government distances itself from the organisation and the stock markets remain subdued. On June 30, three more assured return schemes - MIP-95, MIP-97 (II) and Institutional Investors Special Fund Unit Scheme 97 - are maturing and they will create a Rs 10 billion hole in the UTI balance sheet. For now this will be covered by a fresh Rs 10 billion loan from the State Bank of India that is backed by a government guarantee. The total outgo (UTI has started dispatching the cheques) is slightly over Rs 30billion.
• Even after this, there will be no respite for UTI. On August 1, another promised return scheme will mature. This time, the UTI will need about Rs 3 billion to make good the shortfall between the assured return to investors and the actual return generated.
• Between October this year and June 30 next year, when the UTI's financial year ends, four more MIPs will mature and the shortfall could be at least Rs 7 billion. The Trust has already started negotiating with the government for another bail out.

The UTI is facing crises on two fronts - both liquidity as well as solvency. The government is stepping in to address the solvency issue, while UTI is approaching the banks for liquidity support.

So far, it has been successful. But isn't it plunging deeper and deeper into a debt trap? How will it ever come out of the morass?

Damodaran is certain that the Trust will pull through. "The shortfall in the assured return schemes will be made good by government support. There is no problem on that account.

As far as the open-ended schemes are concerned, there will be opportunities to make money depending on the market conditions. The open-ended schemes are also generating fresh inflows," he points out.

Damodaran is confident that the Trust can carry the interest burden and pay back bank loans. "Initially, we had taken Rs 27.85 billion from the banks to tide over the US-64 redemption pressure. Later, we tied up a Rs 30 billion bank line of credit but only Rs 4 billion has been drawn down from that line. We have also reduced the cost of the bank loan from 10 per cent to 8.5 per cent by replacing the old loans with new ones," he points out.

What has the UTI done so far under his stewardship to wipe out past sins and win back the confidence of investors?

"Well, the entire organisation has been overhauled in the quickest possible time. But more importantly, the mutual fund is now actually managing funds. It's booking profits by trading securities," says a mutual fund tracker.

"This is what is expected from a mutual fund but historically UTI has rarely done that. It enjoyed the notional gains when certain scrips in its portfolio rose but never actually sold them. Its former chairman turned into a tech bull when the tech boom was over.

Now, if UTI makes money even by selling family silver it must do so. It can't afford to play the market maker at the cost of investors' interests," he adds.

The fact is that everyone has a stake in UTI's survival. The rival mutual funds have taken a hit in recent months and are blaming UTI for ruining the market. But everyone knows that UTI's existence is imperative to keep the stock market in good health.

Says a broker: "The FIIs are interested in select scrips. The UTI is the only large domestic player on the bourses. It's the lifeline for the market."

Certainly, UTI has been selling whenever it got the opportunity. It is selling its holdings in Reliance Industries, Larsen & Toubro, State Bank of India, MTNL, Hindalco, Grasim, ITC and other heavyweights to book profits. It is even ready to sell its 11.06 per cent equity holding in ITC if it gets a good price.

Damodaran is looking for a "huge premium" for its stake in ITC and he doesn't mind selling to a foreign company (read BAT). UTI is hoping to collect about Rs 34 billion for the stake. This will enable it to repay the entire bank loan it raised to meet the US-64 redemption pressure.

But UTI also has substantial holdings of illiquid stocks that do not have any market value. What can it do about this huge portfolio?

"They may not have any market value but they have some inherent value. We are talking to the promoters to extract the best possible deals," says the chairman. He also has aggressive recovery plans for the Rs 67 billion worth NPAs, over 90 per cent of which has been provided for following Sebi guidelines.

The Trust has taken over a dozen companies to court to recover money.

There are other plans to generate liquidity. For instance, it is ready to sell off its holdings in the companies that it once promoted.

This includes UTI Bank, UTI Investor Advisory Services, UTI Institute of Capital Markets, UTI Investor Services and UTI Securities Exchange. It will also exit outfits where it is a co-promoter. These institutions are strewn across the financial sector: IL&FS, Crisil, the Stock Holding Corporation, the Over The Counter Exchange of India and National Securities Depositories Ltd.

The move, as and when it materialises, will also redefine the role of the UTI. Once the organisation becomes Sebi-compliant, it cannot afford to have its fingers in every pie in the financial sector. Besides, the government has also extracted a promise that the Trust will sell its stakes in these companies as a pre-condition to the guarantee.

Another feature of the liquidity generation scheme is the establishment of an internal asset reconstruction fund.

At a seed capital of Rs 200 million, sourced from the DRF, the fund is buying out assets worth Rs 2.50 billion from four of the UTI schemes. "Whatever recovery is made through the ARF will be passed on the investors even after the schemes where they invested in have matured," assures Damodaran.

These are moves to tell the world that UTI is serious about a turnaround but the chairman is also busy in putting his own house in order. He stays late in office interviewing officers so that he can speed up the promotion process. Unlike his predecessors who used to sign all big ticket investments, Damodaran leaves buying and selling to the fund managers.

A four-member investment committee takes all investment decisions between Rs 100 million and Rs 400 million, while another committee oversees smaller investments. On the cards are a risk management committee and a new technology platform.

There has been a lot of other house-cleaning too. The retirement age in UTI has already been slashed from 60 years to 58 years; large-scale transfers have taken place to dislodge officers who'd been holding sensitive positions for too long; working hours have been increased and the number of casual leaves halved for officers.

At the same time, he has also introduced a variable pay structure that allows incentive bonuses of one-and-a-half times salary for officers.

At a parallel level, a number of past decisions are being probed by auditors. These are being sent to the finance ministry for a possible reference to a pre-investigative body, as suggested by the panel.

But the Trust is not wasting time in brooding on the past. Ask Damodaran about future plans, pat comes the reply: "There will no more assured return schemes. The exposure of the US-64 scheme will be brought down from thousands of scrips to a few hundred and the equity component of the scheme will come down from 60 per cent to 55 per cent by December this year when it becomes Sebi compliant."

He also does not seem to be perturbed about the sponsorship issue. The finance ministry is working on it overtime.

Although IDBI, SBI and LIC are refusing to acknowledge their parenthood, the ministry is expected to convince them to stay back along with some new players who will substitute for the other 32 small-stake holders.

All the efforts of the government and the UTI management, and the dogged patience of over 20 million investors, will start paying dividend only when the market looks up.

It is ironic that the UTI wasn't smart enough to cash in its pricey chips in February 2000 when the BSE Sensex touched 6,150 points. Now it is trying to make the most of it when the Sensex is down by 3,000 points from that dizzy height.

Everyone knows that the markets and the UTI share a symbiotic relationship and both need each other desperately. So the quicker the cure the better it will be for the entire Indian market.

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