US-64: Time To Mature

ONCE upon a time there existed a strange corporate behemoth called the Unit Trust of India. Nobody quite knew what it was. Like most big financial institutions, it was owned and controlled by the government. It received tons and tons of money from investors—you and I as well as from companies, banks, other financial institutions and pension funds—which it then reinvested in the Indian capital market.

Of UTI's many investment schemes, the most famous was the US-64, which began in 1964, and went on and on. By 1998, US-64 had attracted over 25 million investors whose money created a capital base in excess of Rs 14,000 crore, and made it the biggest fund in corporate India. Those who bought into US-64 were given chits of printed paper, called units. Every year, the unit-holders earned a dividend. At last count, the dividend was 20 per cent per unit whose face value is Rs 10—not as brilliant as 25-26 per cent in 1992-93, but a yield of 14 per cent nevertheless.

UTI seemed to have the appearance of a mutual fund company. But it wasn't governed by SEBI rules, as were other mutual funds. For instance, UTI didn't have to publicly disclose the net asset value (NAV) of US-64's investment portfolio—not even once in the 34 years of the scheme. It was, the management claimed, governed by the special UTI Act, and hence outside the pale of SEBI. So, none of the investors really knew whether US-64 was performing well enough to declare the dividends it did.

Until four weeks ago, most investors couldn't care less. While US-64 never promised an assured return, it always behaved as if it did. The Sensex or the Nifty could rise, fall or wobble for all they were worth. Come hail or high water, US-64 always offered solid dividends—hardly ever less than 20 per cent, and usually quite a bit more. To most investors, it was the closest thing to a steady state.

The tranquility of this magic kingdom was shattered by some nosy scribes. They discovered what a few cussed sceptics had suspected for quite some time—that US-64 was paying out more than what it earned through investments. In fancy jargon, US-64's NAV was less than its current repurchase and resale price. That was bad news. For it meant that this huge, but secretive, market-maker was actually eating into its reserves—something that banks and financial institutions do when they have too many non-performing loans in their asset portfolio.

In fact, the journalists didn't have to do much sleuthing. UTI itself decided to come clean by "marking to market" or evaluating its US-64 portfolio according to market prices of its securities. Given the state of the stockmarkets, that led to a big hit: the scheme had to provision for Rs 3,556 crore as of June 30, 1998. This was more than US-64's reserves. At the end, US-64's reserves were a negative Rs 1,098 crore—hefty enough to be called well-and-truly out of pocket.

Suddenly, all hell broke loose. The hapless chairman tried to signal normalcy by raising the repurchase price, which fooled nobody. He then went belligerent and asked why US-64 should declare its NAV when it had never done so. The finance minister and his secretary pledged that the government was solidly behind UTI. Stern warnings were given to FIIs lest they destabilise this institution. The venerable chairman of SEBI—who, until recently, used to smart at UTI being outside his regulatory ambit—did a volte face and suggested that US-64 be converted into a government-guaranteed savings scheme. Financial magazines screamed "Sell!"

Today's hysteria is as absurd as yesterday's serenity. In a sense, the panic reflects the larger-than-life image enjoyed by UTI and US-64. Since the chairmanship of Manohar Pherwani, US-64 has given the impression that it can beat the market hollow—so much so that it can de facto offer assured minimum returns. It is this aura of invincibility which attracted so many small investors. And, in fairness, they have earned a decent return over the years. For all its drawbacks, US-64 has treated the savings of salary-earners with greater respect than many mutual fund schemes floated during 1993-95.

UTI is suffering from a hard bump in the rump. That happens to mutual funds every now and then. Investors win handsomely for a few years, lose occasionally and win once again. An ordinary Joe like me—who accounts for much of UTI's capital base, and who doesn't have the time and inclination to play the market at the drop of a hat—wants a 7-9 per cent long-term real rate of return on his hard-earned savings. By and large, UTI has been giving that.

WHICH doesn't mean UTI shouldn't reform. It certainly must. After the government recapitalises US-64 as it should, but only on a one-shot basis with tough covenants—UTI must adopt more transparent and portfolio savvy practices. For one, it must disclose the NAV of all its schemes on a weekly basis. This will promote transparency, which is central to fulfilling UTI's fiduciary rule. And force UTI's fund managers to do more frequent portfolio analysis, and titrate their investments more precisely towards higher returns.

While restructuring, UTI must realise that it is not the handmaiden of either IDBI (which provides its chairmen with astonishing regularity), or the RBI, or the occupants of North Block. This awareness won't occur swiftly so long as the government retains majority ownership of UTI. But it had better come, sooner rather than later. Finally, UTI should recognise that it is neither anti-national nor un-macho to admit its real persona—of an asset management company running mutual fund schemes. That would force it to adopt desirable governance practices, such as building Chinese walls between various funds. It would also allow UTI to communicate to its investors the motto of all mutual funds—we will do our best but, remember, you win some and lose some. After all, it's a fund. Not a bank.