The Hindu Business Line : `Co-operative' structure ideal for UTI MF

It would be in the fitness of things if UTI Mutual Fund was turned into a co-operative or `customer-owned' structure, as that would provide the leadership that the money management industry sorely needs. Moreover, as it was the taxpayers' money that was used to bail out the UTI, it is only fair that they be given a chance to reap the benefits from it.

INDIA can claim considerable success in fostering successful co-operatives. Organisations such as Amul or Indian Farmers Fertilisers Co-operative spring to mind. It would be in the fitness of things if UTI Mutual Fund was also turned into such a co-operative or `customer-owned' structure.

This would be better than allowing UTI to be subsumed by SBI or LIC or BOB, the original promoters of Unit Trust of India. The sale of UTI Mutual Fund could fetch the Central Government and the sponsors of the mutual fund as much as Rs 2,000 crore.

However, the long-term benefits of avoiding a sale and converting UTI to a co-operative would be far greater. Principally, it would provide the leadership that the money management industry sorely needs.

Vanguard example: The original customer-owned firm, Vanguard, is one of the leading asset management companies in the US. Vanguard has many firsts to its credit, the most important of which is that it is owned neither publicly or privately.

The fund manages money for its clients by paying a fee to fund managers chosen by a board, which does not have to generate profits for its owners.

The leadership provided by Vanguard has had many positive effects for the US mutual fund industry. One, Vanguard was the first to introduce a product more ideally suited to US investors than any other product — index funds.

Vanguard has also provided leadership on another important front — costs. The costs of managing a mutual fund have been brought down substantially since Vanguard came to existence. The cost leadership of Vanguard may not have prevented other mutual funds in the US from fleecing its investors. But it has at least provided an alternative to them.

UTI, the leader: In India, UTI Mutual Fund has already assumed the leadership role on many fronts. It is the preferred vehicle for a number of retail investors. The number of customers of other mutual funds is one-fifth, or even lower, than in UTI. The costs charged by UTI in managing some of the equity mutual funds are the most competitive.

If UTI were taken over by some other profit-driven entity, its effectiveness as a leader will be seriously under threat. Given the factors that influence fund practices, it is also clear that only a customer-owned fund or a co-operative can provide ethical leadership to the industry.

The conflict of interests embedded in a shareholder-owned money management firm often undermines the interests of mutual fund investors. It also robs investors of choice. There will be no other customer-owned money management organisation in the country if UTI were to be sold to one of the original sponsors. Even the erstwhile Chairman of UTI Mutual Fund, Mr M. Damodaran, had suggested this alternative to the Finance Ministry. His efforts, however, have not had any results so far.

Sponsors claim: The claim of the sponsors of UTI Mutual Fund also does not also sound legitimate. They did not spend a single penny to bail out UTI when it was in deep trouble. The taxpayers' money was spent to honour UTI's obligations. Now, to allow the sponsors to reap the benefits of UTI's growth over the decades does not appear fair.

The gains from UTI's growth should belong to the taxpayer. And what better way to reward taxpayers than to convert it into a co-operative? At the very least, LIC should be allowed to take over UTI Mutual Fund, if conversion of UTI into a co-operative is not possible. That would provide the taxpayer complete control over UTI and preserve its public sector character better.

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