In the mid-80s, a little after the Bofors controversy broke out, Finance Minister V P Singh moved out of North Block and Prime Minister Rajiv Gandhi took charge of the Finance Ministry. The 1987-88 Budget, which Rajiv presented, contained some important announcements. Besides the Minimum Alternate Tax or MAT, which was imposed on what were known as ‘zero tax-paying companies’, Rajiv also announced the creation of a new regulator for India’s capital markets, the Securities and Exchange Board of India or Sebi, and a new mutual fund, to be promoted by India’s largest bank, State Bank of India, to widen the choice for investors, as he said.
For decades before that, UTI Mutual Fund, started through legislation pushed by the then Minister for Economic and Defence Coordination T T Krishnamachari, had had a monopoly. Pakistan, incidentally, had been a step ahead with its National Investment Trust Limited, NITL, which appears to have prompted the Finance Ministry and its Minister to launch this fund.
In the 1980s, when more capital was being raised from the capital markets by companies, SBI, having received a cold response from the Finance Ministry, approached Prime Minister Rajiv Gandhi. The former SBI Chairman, D N Ghosh, has recalled how bureaucratic hurdles had to be surmounted to float a new mutual fund or asset management subsidiary. When Rajiv was told about it, he asked Ghosh to leave the concept note with his secretary, Sarla Grewal, and added that he would include it in the upcoming Budget. That’s what he did in 1987.
But the chief of India’s top bank, with the widest network of branches, which had set for itself a target of Rs 100 crore, was forced to work the phones — calling Hindustan Lever chairman Ashok Ganguly and Reliance chairman Dhirubhai Ambani — to ensure that the initial offering was successful, Ghosh has written.
By that time, the big daddy, UTI, had assets of Rs 6,700 crore. After SBI’s start in June 1987, helped by a tax break from the government, many state-owned banks competed to start similar asset management companies which launched mutual funds. Canara Bank, Indian Bank, Bank of Baroda, Punjab National Bank, LIC and GIC followed, and by the early 1990s, assets swelled to over Rs 45,000 crore.
The big push for the industry came in July 1991, when in his famous first Budget, Manmohan Singh announced the government’s plan to open up mutual funds to private and joint sector participation. To safeguard investor interest, and to ensure healthy growth of capital markets, a new set of rules were put in place through the newly empowered regulator, Sebi. The first private fund, Kothari Pioneer, was based in Chennai, but was subsequently acquired by Templeton.
Less than a decade later, in 2001, the industry was jolted after trouble started in UTI as redemptions rose. In the year of a major securities scam, featuring Ketan Parekh, UTI was forced to freeze the sale and repurchase of units of its flagship scheme, US-64, and cut dividend as its reserves took a big hit. With this ballooning into a huge political controversy and leading to a crisis of confidence in the financial markets, the NDA government of Prime Minister Atal Bihari Vajpayee had to approve a restructuring of India’s oldest mutual fund. The chairman, P S Subramanyam, was sent out, and a civil servant, M Damodaran, who was then a joint secretary in the banking division of the Finance Ministry, was assigned to clean up the mess in a firefighting operation.
It was RBI Governor Bimal Jalan who worked on the idea of bifurcating UTI — with UTI-1 handling all assured return schemes, with the other part given the mandate of running all schemes that were linked to a Net Asset Value, or NAV. India’s top insurer, Life Insurance Corporation (LIC), was told to work on a new structure for an asset management company which led to four sponsors — LIC, SBI, PNB and BOB — promoting the new UTI Asset Management Company by 2002-03, after the government approved a Rs 14,000 crore restructuring scheme.
Over a decade on, it is a reflection of the transformation of the industry that UTI Mutual fund is no longer at the top of the pecking order. After the clean-up, tightening of regulation, and with rising incomes, India now has several fund houses with record assets under management of over Rs 13 lakh crore at last count, and several lakh unit holders. And the first mover, Pakistan’s National Investment Trust Limited? At the end of August this year, a little over 55,000 unit holders, and funds under management of Rs 92 billion. An amazing contrast.