The Hindu Business Line : UTI's assured return schemes -- Hardly reassuring?

INVESTORS in the assured return schemes of the Unit Trust of India are now in a delicate situation. The UTI is insisting it will meet the assured returns and capital protection guarantees. But there is a big uncertainty : Who will help the UTI meet the obligations under the assured return schemes, and to what extent?

Backdrop: Starting this month, the UTI will have to meet obligations that will total to some Rs 20,000 crore over the next 24 months in assured returns schemes, such as Monthly Income Plans and Institutional Investor Special Unit Scheme (IISFUS). There are shortfalls in many plans due for redemption. The aggregate shortfall is set to run into a few thousand crore rupees at the least. It may be difficult to bridge them with improvement in portfolio values. The Development Reserve Fund (DRF) — the bedrock for the UTI guarantee — with its corpus of Rs 1,600 crore can hardly hope to meet the aggregate shortfall. Nor does it have liquidity of any high order, saddled as it is with fixed assets transferred from US-64.

The UTI has approached the Finance Ministry for support. However, the Government has asked the Securities and Exchange Board of India to look into whether the `sponsors' of UTI would have to meet the shortfall. However, it would be unfair to ask LIC, SBI, IDBI, Syndicate Bank and the RBI — the sponsors — to meet the shortfall. They invested Rs 5 lakh collectively in the initial capital of US-64 in 1963-64. But they are not sponsors of the UTI in any manner of reckoning. What SEBI should do: SEBI should look at providing directives that cover the following aspects:

The UTI has to meet its obligations under the assured return schemes — both on returns and capital protection.

The Government and the UTI must cobble together the sums required.

The flotation of new schemes to lure some investors in MIPs to roll-over their holdings into such schemes must be discouraged.

The investors should be paid cash and left free to invest the sums, instead of a roll-over.

Communication to investors — on the choice of roll-over or redemption must be ensured in simple and clear terms, not buried in legalese.

SEBI should also explain why it allowed the UTI to impair the quality of DRF assets.

As a flexible move for the UTI, SEBI should allow one-shot redemption of all MIPs and IISFUS on the lines of Canstar. (Canara Bank was allowed to buy out the units of Canstar, three years ahead of maturity. This ensured the exercise was complete with repurchase at Rs 27 per unit, instead of the Rs 40 per unit payable on maturity.)

A one-shot exercise: The problem of MIPs and IISFUS that have assured returns for their entire maturity should be settled once and for all. The solution would be to allow the UTI to go in for a redemption of all such schemes. Clearly, the promised 12-14 per cent rates are difficult to obtain in the next two years.

By allowing a redemption now, the interest outgo at such high rates for one-two years may be saved. This may reduce the shortfall, and after adjusting the DRF, the size of the bail-out package that would be required. Of course, investors stand to lose in such an eventuality.

But this may be better than being faced with the ambiguity of what they would receive and who would bridge the gap, if at all, between the promised returns and the net assets.

Investors have to put up with this loss, as a price for blindly investing on the basis of `assured returns and capital protection'.

Even during the period of the MIPs pending redemption, many private sector debt funds and UTI's Bond Fund turned in attractive returns. That too with transparency and without any capital impairment.

A government bail-out: The Government cannot afford to pass the buck. Investments in the MIPs have been on the premise that the UTI has government support. Neither the UTI nor the Government has done anything to dispel this notion.

Going for a one-shot redemption exercise, the Government can ensure that it contains the bail-out cost. The case for a bail-out package in the MIPs is at least as strong as US-64 with two bail-outs that will cost almost Rs 10,000 crore by May 2003.

The Government could issue bonds with a five-year tenure for the shortfall faced by UTI. This would ensure that investors get a liquid option for their dues. Alternatively, the Government can issue securities specifically to a special purpose vehicle — which would be like a gilt fund — in which investors could be allotted units.

Performance, not assurance counts: The MIP mess is a clear pointer to investors that investments are better made, when based on performance and trends in interest rates and returns, than on assured returns and guarantees.

Investors should wait for a final decision and not exit, based on the cut in exit loads and removal of lock-in period made by UTI.

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