US-64 lands in Court

S. Vaidya Nathan

QUITE predictably, the Unit Trust of India (UTI) has been hauled up before the court. The Bombay High Court has asked the UTI to file a petition before August 1, 2001. The public interest litigation has been filed by Mr Pradeep Bhavnani, President of the National Association of Small Savers. The PIL asks for:

*lifting of the UTI move to freeze sale and repurchase;

*that UTI be directed to repurchase at the same price offered to investors;

*direction to the UTI to raise the dividend to 20 per cent on US-64.

*a CBI enquiry into the pull-out of funds by the corporate sector. In April-May, Rs 4141 crore was pulled out. The corporate pull-out amounted to Rs 4000 crore.

Further, the PIL makes the following points:

*Redemption of investments by large corporate houses were not in due course or a as a matter of bona fide transaction. It was on advance information made available to them on disorder the UTI had created.

*Reliance, IPCL, BPCL, IOC and other MNCs were among US-64 investors. Prior to announcement, many companies pulled out funds.

*Despite controlling assets of Rs 60,000 crore, the UTI did not deem it answerable to investors.

*The UTI had by its decision committed a breach of faith by suddenly changing the rules of the game to protect itself from self-created bankruptcy in blatant disregard of the interest of small and medium investors.

*The current yield of 6.67 per cent is less than the prevailing bank interest rate per annum.

*The UTI had no right to suspend sale and repurchase since there was no clause in the agreement or conditions for investment about temporary suspension of sale and repurchase.

*Pending hearing and final disposal of the PIL, the association pleaded for a stay on the impugned decision.

FM on US-64: The Finance Minister, Mr Yashwant Sinha, has expressed the following views on US-64:

*The Government would order a full-fledged independent probe into insider trading in US-64 by top corporate sector players and commercial banks which had redeemed units in April-May 2001.

*The probe would also cover the UTI's investment decisions and whether any investments were made on non-commercial considerations.

*The Government would have a nominee on the board of trustees of the UTI, a practice that was stopped in 1997.

*The Ministry is in possession of information which hinted at insider trading.

*The redemption in April-May fuelled suspicion that information was passed on to the corporate sector and banks.

*The probe would cover the role of the UTI trustees and whether they were privy to price-sensitive information on the decision to freeze sale and repurchase and misused it.

*A bail-out is not in consideration immediately.

*The Government would make efforts to bring US-64 under the regulatory purview of SEBI.

*The Finance Ministry was kept in the dark till the last moment. Though Mr P. S. Subramanyam mentioned the dividend and freeze, there was no intervention. This was because the stoppage of the trustees' meeting would have had ``very, very adverse consequences on the stock market and investor confidence''.

*The Finance Ministry has not interfered with the functioning of the UTI.

*Mr Sinha has said the buck stops with him, that he is not shirking responsibility for the UTI fiasco, and would resign if his conscience forces him to do so.

Manmohan Singh on UTI: The former Finance Minister, Dr Manmohan Singh, has expressed the view that the UTI must be brought under SEBI's regulatory purview to protect the interest of small investors. He also expressed concern for investors who have invested savings in US-64 and are now stuck with no possibility of early redemption.

NAV-option considered: The UTI had a circular resolution approved by the board four days before the July 2 meeting. This provided for an enabling clause to switch to NAV-based pricing of US-64 units. The trustees were also empowered to suspend both sales and repurchases. These included fundamental charges to the structure of any scheme operated by UTI.

The circular resolution was moved as the UTI Act 1963 does not empower suspension and repurchase. The amendments were approved by most of the trustees. The circular was received by the Minister on July 9.

Legal sanctity: The Government is looking into the legal sanctity of the freeze imposed by the UTI on sale and repurchase of its flagship fund, US-64 for a period of six months till December 2001.

Expert panel: The UTI has set up a consultative group of outside experts to revamp US-64. The members of the group are Mr Y. H. Malegam, a chartered accountant; Dr R. H. Patil, former Managing Director of the National Stock Exchange; and Mr N. A. Soonawala, non-executive director of Tata Sons. Mr R. P. Chitale, a UTI trustee, would also join the group. The group is to advise and provide an external perspective on US-64 to the UTI board.

UTI austerity drive: The UTI has decided to observe austerity measures in day-to-day activities to provide better returns to unitholders. The new acting Chairman, Mr K. G. Vassal, has asked UTI employees to save on avoidable expenditure in the interest of investors. The UTI Chairman also wants ``to make UTI the most enviable and preferred mutual fund of India''. The decline in UTI's share of assets has been attributed to falling markets and repurchases, redemption and termination of Rajlaxmi Unit Scheme (RUS-92).

Pension divided: Kothari Pioneer Mutual Fund has announced a dividend of 12 per cent for the pension fund.

SBI MF in post-offices: SBI Mutual Fund has entered into an arrangement with India Post for distribution of mutual fund products. The products will initially be distributed through 42 post-offices and later the channel would cover all the post-offices in the country. SBI MF plans to have a gross distribution target of Rs 2,500 crore for the current year with net inflows of Rs 1,500 crore. India Post would get a commission ranging from 0.95 per cent to 1.95 per cent from SBI Mutual Fund. The post-office also has a tie-up with IDBI Principal Mutual Fund for distribution services.

PruICICI Children's Plan: Prudential ICICI Mutual Fund is to launch an open-end plan for children. The scheme, christened Prudential ICICI Child Care Plan, opens for subscription on July 16 and closes on August 6. There are two plans -- a Study Plan and a Gift Plan. The scheme offers scholarships to meritorious students (of unitholders) through a separate trust and provides accident insurance cover for the parent/guardian.

US-64 prices: The Unit Trust of India's flagship fund US-64 is closed for sale and repurchase till December 2001. This is an unprecedented move in the fund's 37-year history. The fund is under book closure and recently announced its decision to suspend sale and repurchase.