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UTI needs unit holders' nod for plan changes

Janaki Krishnan & Rakesh P Sharma in Mumbai

The Unit Trust of India's application to the Securities and Exchange Board of India to either re-set the returns or its assured returns schemes or close them seems to be a mere formality.

Under Sebi's mutual fund regulations, any change in the attributes of the scheme - the returns, the investment strategy among others - would require the fund to get the approval of its unit holders. Only after getting a nod from 75 per cent of the shareholders, the funds can go ahead with the changes.

Sebi sources said that since none of the assured returns schemes of UTI is under its regulations, there was no sense in UTI making an application to it. "If they want to re-set the returns or close schemes, they have to approach their unit holders," sources said.

The liabilities under the schemes maturing this year will be duly met - it is only in respect of the longer maturity schemes that the Trust is planning to re-set returns, aligning them with the prevailing interest rate scenario.

There are some schemes of UTI which are due for redemption only after 10-20 years. According to reports, UTI has been told to approach Sebi to obtain its consent on the issue of foreclosure of any of its schemes. The total market value of the assured returns scheme is around Rs 17,000 crore (Rs 170 billion).

Aligning the returns of the schemes with market rates is expected to reduce the shortfall in the schemes (the gap between the actual asset value and the assured value) and thence the liability to the government, which has taken upon itself to bail out the Trust from its current financial morass.

Most of the assured schemes are monthly income plans, and according to estimates the shortfall in them is to the tune of Rs 9,000 crore (Rs 90 billion). Some of the schemes, especially those that were launched earlier in an era of high interest rates, offer returns as high as 14 per cent.

The current earnings on these schemes would be lesser than 8 per cent. There are 22 of these monthly income plans - in some of them both principal and dividend are assured while in the others only the principal i0s assured and the returns are announced annually.

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