UTI: More skeletons

Aarati Krishnan

ONCE the dust settles over the Unit Scheme-64 controversy, the Unit Trust of India and all its misdemeanours may once again slip back into comfortable obscurity.

The US-64 is undoubtedly the largest of the UTI's problem schemes; and the one with the potential to wreak the maximum havoc on investor confidence.

But the Unit Scheme-64 is certainly not the first UTI scheme to get into trouble. Nor is it likely to be the last. Leaving aside the US-64, the UTI manages assets of over Rs 25,885 crore under various assured return products. And several of these are neck deep in trouble.

For nearly a decade now, the UTI has launched a steady stream of monthly income schemes, a few ``assuring'' returns for five-year terms, a few for one year and a few promising to protect the investor's principal at the time of maturity, once the scheme runs its five-year term.

The MIPs (I, II, III and IV) of the 1997 series have, for instance, assured returns ranging between 13-15 per cent for their full five-year term. Returns which are clearly unattainable in the present interest rate scenario.

Several of these have been dipping liberally into their reserves to keep the annual dividend payouts at the promised levels. But this has taken a toll on the NAVs of the ``growth'' options of these schemes (which do not pay out dividends but instead accumulate surpluses so that the assured returns are paid in lumpsum at the time of redemption), and all of the 1997 MIPs have NAVs which are at present below par.

With all of these schemes coming up for redemption in 2002, the UTI will be forced to make good the difference between the prevailing NAV and the promised redemption price (for the cumulative option) and the face value (for the dividend options) of these funds. The 1997 MIPs manage a total corpus of Rs 5,600 crore.

Then, there are the various Institutional Investors Special Funds of the 1997 and 1998 series which have also assured returns of 13.5-15 per cent for a five-year term, which are also likely to come up for redemption over the next couple of years. These manage net assets amounting to Rs 3,500 crore and also have NAVs below face value.

There are also the massive ``special'' schemes of the UTI launched earlier, that have assured a lumpsum amount to investors on maturity, which are likely to be redeemed by investors in a steady trickle:

*The Rs 4,040 crore Children's Gift Growth Fund, which has assured an effective return of 14 per cent to investors on their children attaining majority;

*The Rs 418 crore Rajlakshmi Unit Plan 1994, in which the UTI has promised a lumpsum of Rs 21,000 for every investment of Rs 1,500 after the expiry of 20 years.

There is more. There is also a relaunched version of the Chidren's Gift Growth Plan and the Rajlakshmi Unit Plan, which the UTI floated as late as 1999, again with assured returns after a fixed tenure. The UTI recently attracted flak for abruptly redeeming the first Rajlakshmi Unit Scheme 1992 after it found it impossible to meet the promised level of returns on the fund.

Most of UTI's assured return products in recent times are backed by the Development Reserve Fund. This is a fund created from UTI's initial corpus and from small appropriations from all the new schemes floated by the UTI. However, whether the DRF's corpus (of Rs 1,100 crore in June 2000) will prove adequate to service shortfalls on all the present and future assured return schemes of the UTI is a big question. That the DRF is managed under the auspices of US-64 only adds to the uncertainty on this count.

Over the past couple of weeks, the Government has been involved in frenetic damage-control exercise involving the US-64. In the US-64's case, the regulators' apathy has allowed the scheme's troubles to snowball to a point where the problem is almost beyond solution. It might be better to unearth the other skeletons in UTI's closet -- its assured return schemes -- before they come back to haunt the market over the next few years. This might be better than resorting to firefighting measures when it is far too late to do any good.