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N. A. Mujumdar

The book by the first Executive Trustee of the UTI, Mr V.G. Pendharkar, offers interesting insights into the evolution of the mutual fund, the subtle power games between the Centre and the RBI, and the role of "foreign experts" and other lobbies in weaning the UTI away from its original objectives, says N. A. Mujumdar.

The solution to the UTI's problems may lie in rediscovering its original objectives.

AT a time when many experts are ready to write the Unit Trust of India's obituary, it is courageous of Mr V G Pendharkar — the first Executive Trustee of the UTI — to write its history. Mr Pendharkar, 87, deserves to be commended for producing an excellent book, Unit Trust of India: Retrospect and Prospect, UBS Publishers. However, it is not surprising that he is sad at the recent developments which have made UTI a moribund institution.

Mr Pendharkar provides interesting insights into the evolution of the UTI, the subtle power game between the Centre and the Reserve Bank of India, and the role of "foreign experts" and other lobbies in weaning the UTI away from its original objectives. Does such history have any lessons for shaping the future of the UTI? One is not sure. Mr Pendharkar stops short of sketching a road map for the UTI's recovery. One hopes that he will address this issue in his next book.

Mr Pendharkar begins with the uniqueness of the UTI. Though established in 1964 by an Act of Parliament, neither did the Government of India own it nor contribute any capital. The RBI was asked to contribute one-half of its initial capital of Rs 5 crore, and given the mandate of running the UTI in the interest of the unit-holders. The State Bank of India and the Life Insurance Corporation contributed 15 per cent of the capital each, and the rest was contributed by scheduled commercial banks which were not nationalised then. This kind of structure for a unit trust is not found anywhere else in the world. Again, unlike other unit trusts and mutual funds, the UTI was not created to earn profits.

Today, where market-faddism rules supreme, it is necessary to re-emphasise this original objective of the UTI. Mr Pendharkar writes: "In the course of nearly four decades of its existence, it (the UTI) has succeeded phenomenally in achieving its objective and has the largest share anywhere in the world of the domestic mutual fund industry.'' The emergence of a "foreign expert" during the setting up of the UTI makes an interesting story. The announcement by the then Finance Minister that the Government of India was contemplating the establishment of a unit trust caught the eye of Mr George Woods, the then President of the World bank. Mr Woods took a great deal of interest in the Indian financial system, as he was one of the principal architects of the ICICI, in which his bank, First Boston Corporation Bank, had a sizeable shareholding. Mr Woods offered, through Mr B.K. Nehru, who was India's Executive Director on the World Bank, the services of an expert.

The Centre jumped at the offer, and asked the RBI to hold up the finalisation of the unit trust proposals till the expert visited India. Mr Pandharkar's reaction to this will make Indians proud. "I was not too happy about it, as I did not think it was beyond our capabilities to set up a Unit Trust and run it on our own. In my view, the offer typified the low estimate Westerners had about our abilities. But what surprised me, not only in this case but in several others, was that even our own people do not have faith in our officials.''

The story of the foreign expert does not end here. Mr Pendharkar goes on to elaborate with his tongue in cheek. "The expert, Mr Sullivan, a retired senior official from one of the middle-sized mutual funds in the US and a personal friend of Mr George Woods duly arrived with his wife in late October 1963, and spent a fortnight in the country. They were a charming couple with old-world manners and very much interested in archaeology. We were very glad to take them to places of archaeological interest, such as Kalva caves, Elephanta, Ajanta, Ellora and so on, which they wished to see. After his return from these visits, Mr Sullivan discussed with me our draft proposals to establish the Trust in the public sector." The only point Mr Sullivan made was that the provision to limit the ownership of units to individuals might result in unnecessarily restricting the market for units. While making this point, he had in mind the practice in the US, where small pension funds are an important class of customers for the unit trusts. Though Mr Pendharkar did not agree with this view, the Centre accepted the foreign expert's suggestion, and the necessary amendments were made in the draft Bill. Thus, began corporate investment in the UTI, which received a boost from the tax concession given by the government in the 1990-91 Budget. According to this concession, the dividends received by a company from investments in other companies, including the UTI, were completely exempt from corporate income tax, provided the dividends declared by the investing company were higher than the dividends received.

The result was a phenomenal increase in corporate investment which accounted for 57 per cent of the total capital under US-64 scheme (page 225). Because of high liquidity the corporate sector used the UTI to park its liquid funds. This added to the volatility of the UTI funds. The corporate lobby which perhaps subtly opposed the establishment of the UTI in the public sector made use of it for its own benefits later. The Government-RBI power game started with the finalisation of the UTI charter itself. The RBI draft of the UTI charter stipulated that the Chairman will be nominated by it, and one more nominee would be on the Board of Trustees. While finalising the draft Bill, the Centre changed this stipulation. The Chairman was to be nominated by the Government, albeit in consultation with RBI. Mr Pendharkar explains: "In a subtle way it makes the Chairman dependent on the Government. Although the appointment was to be made in consultation with the Reserve Bank, the Government could appoint a person of its choice as Chairman even if the Bank did not approve of him. Consultation does not imply approval. Moreover, it is an established convention that the appointing authority is also the disciplinary authority.'' It is obvious that Government authority does make room for political and bureaucratic meddling. Would things have been different, if the UTI were to function under the RBI umbrella? One wonders.

That raises the broader question of privatisation, which is being bandied about as a panacea for all economic evils. This is not correct. Mismanagement is ownership neutral. Mr Pendharkar believes that the UTI should continue to operate in the public sector and, perhaps, autonomy is the best solution. Even in the case of public sector banks, the Narasimham Committee pleaded for greater autonomy. But today privatisation is the buzzword, and nobody bothers about autonomy. Mr Pendharkar makes a fervent plea for reviving the US 64. "It is quite clear that public interest is involved here. If there is no chance of reviving the US 64, it will mean that a million investors from the low and middle income groups will be financially ruined. This would be most undesirable and public interest demands that some effective steps should be taken to avoid such a calamity."

Investors can only hope that Mr Pendharkar's plea is heeded to.

(The author is a former Adviser to the RBI.)

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