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UTI-II sale proceeds to meet shortfall in MIP redemptions

Sidhartha & Subhomoy Bhattacharjee in New Delhi

The government is planning to use the proceeds from the sale of the UTI-II stake to meet the shortfall in the redemption of Unit Scheme-64 and other monthly income plans to be taken over by UTI-I.

Senior government officials told Business Standard the government was planning to sell the entire stake in UTI-II, which has assets of more than Rs 17,000 crore (Rs 170 billion).

Although the modalities for the sale have not been decided, the government does not intend to compensate the existing sponsors of UTI.

The sponsors include the Life Insurance Corporation, the Industrial Development Bank of India, State Bank of India and other nationalised banks and state-owned insurance companies.

In the case of the existing sponsors not getting a share of the sale proceeds, the funds will pass directly to the government, to be redeployed in UTI-I to help meet a shortfall of over Rs 14,000 crore (Rs 140 billion).

The government has decided to cash in on the strong UTI brand for UTI-II for a higher realisation from the stake sale.

The US-64 brand will, however, remain with UTI-I. "Over the years, US-64 has earned a bad name. We intend to rename the scheme before it is transferred to UTI-II," said an official.

The officials said the details of the sale process would be finalised after the repeal of the UTI Act through the promulgation of an Ordinance.

They said the sale would attract a lot of interest from mutual funds, including foreign ones, because it would give them an opportunity to access UTI's wide distribution network.

The government may also allow UTI-I to function as a special purpose vehicle, giving it the option of foregoing the three-tier model, a must for all mutual funds under Securities and Exchange Board of India guidelines.

The finance ministry, which is working out alternatives for UTI-I, is also considering the option of creating a company to handle the asset base of Rs 24,196 crore (Rs 241.96 billion) at current market value.

The other option is to form a trust to run UTI-I. The officials added the UTI (Repeal) Bill would specify the exact structure. "Based on the law ministry's comments, we will take a decision," said an official.

Although the Cabinet decision said UTI-I would be Sebi-compliant like UTI-II, with it not issuing any new schemes there was no reason to go in for a three-tier structure.

UTI-I would be the repository of the US-64 corpus, along with all the assured-returns schemes, said the officials. The government has made it clear there will be no fresh subscription to these issues.

While US-64 can be traded on the bourses even after May 2003, once the units are presented for redemption to UTI-I they will be extinguished.

The government has committed a Rs 14,561 crore (Rs 145.61 billion) bailout package for the fund to meet the difference between the net asset value of US-64 and the administered redemption price, as well as for meeting the liability on the assured-returns schemes.

Officials say the government has three options of recasting UTI-I. It can operate as a trust, a company or as a special purpose vehicle.

As per the Cabinet decision, the body will be managed by a government-appointed administrator and a team of advisers. There had been no proposal to continue with a sponsor for UTI-II, the sources said.

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