Unit 64, may be UTI's most problem ridden scheme, but it is not the only one which dips into its reserves to pay dividend. Restructuring US-64 without looking at the rest of the organisation makes little sense and it is important that the Deepak Parekh committee looks at the entire organisation.Parekh has a tough enough job coming up with a restructuring proposal for US -64 which will not be violently opposed either by government, UTI's management or the investors (mainly corporate biggies who have been persuaded to hang on to their units) His toughest decision would be whether or not to ask the government to bail out US-64 with a soft loan.Bleeding the exchequer is the simplest solution. It pleases everybody. Individual and corporate investors are protected. The government is happy that it can continue to use UTI to push its agenda. SEBI is also pleased that its will not have to face angry investors. As for the exchequer, it is used to being bled.Starting with Dr. Manmohan Singh's massivedole to nationalised banks, to his successor P.Chidambaram's hand-out to Indian Bank, UCO Bank and United Bank, the cost of financial mismanagement is always passed on to the general public. The Prime Minister, who personally persuaded Parekh to head the committee, can also congratulate himself.Parekh has the reputation of being savvy, persuasive and reform minded, but he would be reluctant to upset the powers-that-be. Getting an independent committee to recommend a dole, would go down far better than a ministry decision to do the same.Parekh's reputation may be in danger of losing some shine, but he can argue that protecting individuals investors was his priority - and so much the better if it protects everybody else too.While the Parekh committee is going through the motions of seeking advise, I have a feeling that it will go in for the soft option. Why? Because the government clearly wants a quick solution and not long drawn out structural reforms.The justification of a bail out isalready happening. It is pointed out that even in the massive Savings and Loans scandal in the US, the government gave a bail-out and the tax-payers took the hit. In the US, this would have been accompanied by a clean-up, fixing of responsibility and even punishment. In India that is not on the agenda.UTI itself is reluctant to change and does not even acknowledge a serious problem. As for fixing responsibility , one is told that since there are no rewards for performance, how can there be penalties for failure? The obvious answer is that government should quickly get out of the mutual fund business. May be the Parekh committee would recommend this.Without structural changes, UTI and nationalised bank-run mutual funds will remain a Ponzi with the government playing the last sucker.In case of UTI, the government pays directly, while in the bank-run funds, the banks first bail-out the mutual fund promoted by them and the bank in turn gets a dole from the government. Various advisors andcolumnists are now critical about US-64's Ponzi-like operations and are arguing for long term changes.But weren't they were around when G.V.Ramakrishna, as SEBI Chairman sounded the alarm bells five years ago? Most of today's commentators held high offices and were in a position to support Ramakrishna's effort or to anticipate the impact of a tight money policy on structurally unstable institutions such as UTI. But they believed that US-64 was too big to ever collapse or that there would always be a strong bull market every few years which would restore its Net Asset Value.Indecisive governments, red tape and political instability on the one hand and the rapid decline of erstwhile blue-chip business groups on the other, ensured that a strong bull market never happened after 1994.Disclosure of NAV, an end to assured returns and the separation of UTI's term lending operations from its fund management business were Ramakrishna's main demands. ICICI Chairman, Narayan Vaghul also recommended asplit in UTI's functions and the need to regulate it. This led to partial regulation of UTI, but the report was largely ignored.Those days, UTI Chairman S.A.Dave was too valuable to the finance ministry to upset. While Ramakrishna was insisting on public sector units following at least minimum disclosure and listing norms, Dr.Dave's cooperation in buying up almost the entire public sector shares sold through ill-conceived bundles/packets, allowed the government to raise money. UTI obligingly picked up huge holdings in private sector companies as well.In fact, the bail-out of UTI can be justified precisely on this count. One can argue that UTI funds have been used by the government for market intervention and other adventures for over two decades. This was at the cost of its investors rather than the exchequer. It is time the government paid back its debts by funding UTI through a soft loan.Clearly the time for painless structural change was five years ago. But a bail-out without such change ismore dangerous. Hopefully the Parekh committee will ensure that structural change has to come before the dole.
