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Crisil pegs UTI bailout below Rs 14,000 crore

BS Markets Bureau in Mumbai

A Crisil report says the overall amount required to bailout the Unit Trust of India would be much less than the around Rs 14,000 crore (Rs 140-billion) already committed.

According to the Crisil Centre for Economic Research mid-year outlook for 2002-03, the nature of the schemes being bailed out, the timing of their redemption as well as the direction of the asset markets will determine the burden on the exchequer.

It may be recalled that the government's rescue package is directed at two set of schemes: the assured return schemes, which assure terminal capital and a fixed dividend, and the Unit Scheme 64.

In the case of US-64, UTI would be redeeming its units at an average price between Rs 10 and Rs 12 under its special administered price for holdings of up to 5,000 units.

The Crisil study says that this price works out to Rs 11.40 depending on the investor-mix and time of redemption.

The difference between the weighted average price and the current net asset value is the shortfall per unit, which needs to be bridged under the government's bailout plan.

The Crisil study adds that if US-64's equity portfolio rises by 141 per cent in 2004 then the fund house will not require a bailout. In case the scheme's equity portfolio gains 20 per cent, then the bailout package would be just Rs 4,920 crore (Rs 49.20 billion).

In case the equity portfolio falls by 10 per cent, the bailout sum for the government would rise to Rs 6,240 crore (Rs 62.4 billion). But if the equity portfolio remains unchanged, the bailout package would be Rs 5,820 crore (Rs 58.2 billion).

"Would there be a sharp rise in the redemption in the first-half of 2003-04? That seems somewhat likely but the government might mitigate the redemption pressure by providing additional incentives to investors to hold onto their US-64 units by giving significant tax sops both in the next Budget," the report says.

Meanwhile, the 21 ARSs have had two problems, which have led to the need for the government support. These schemes have promised returns in the range of 13-14 per cent, while their actual earnings are between 7.5 per cent and 8.5 per cent.

Secondly, these schemes have the assurance of capital protection on maturity. The Crisil report says that the important issue with the ARSs is the timing of their redemption. These are spread over the next four years and consequently the fiscal impact would be distributed over this period.

The cumulative amount to be provided to the ARS adds to Rs 1,332 crore (Rs 13.32 billion) for 2002-03.

"If we use this redemption schedule for ARS to build the worst case scenario for the current year (2002-03), then the total bailout in 2002-03 would be just Rs 3,390 crore (Rs 33.9 billion). If the scenario persists in 2003-04 and full redemption of US-64 happens, then the burden would be Rs 6,800 crore (Rs 68 billion) in the next fiscal. These are clearly extreme situations and the actual impact could be well smaller," the report notes.

Finally, the direct impact of the budget would depend on the specific mechanism employed for funding the bailout. There are two possible models, the Crisil report says.

One is that UTI-I issues bonds to the government at a certain rate of interest, say 7 per cent. This appears as a capital expenditure in the budget and creates an asset.

But if UTI is unable to service the debt, it would entail a provision on the revenue account.

Under the worst case scenario, this would be Rs 3,391 crore (Rs 33.91 billion) and Rs 240 crore (Rs 2.4 billion), respectively, in 2002-03. So, the net addition to the expenditure in the 2002-03 Budget would be roughly Rs 3,628 crore (Rs 36.28 billion).

In case UTI-I issues bonds to banks and financial institutions on the back of government guarantees, then this would be a contingent liability on the government's books and the impact on the expenditure would be only to the extent of the interest payment guaranteed. This works to Rs 240 crore this year, Crisil says.

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