UTI under pressure to revamp

The Finance Ministry, sources said, is keen that the trust should implement all the measures recommended by the Parekh panel. “That is why the government has already pitched in with the Special Unit Scheme (PSU portfolio will betransferred to this scheme which will in turn issue government securities. The image of the UTI needs to be improved in the eyes of investors. It can distribute funds depending on its earnings,” they said.

The Parekh report was highly critical of the Trust’s dividend distribution policy. The trust has followed a dividend distribution policy of providing increasing regular returns to investors, while being indifferent to competitive market rates or the dangers to the financial health of the Scheme.

The Trust has time and again (in 1966, in the period 1974-76 and most recently in 1996 and 1997) reiterated its commitment to this policy in the face of severe erosion in asset values and sustainable income streams. This has helped US-64 is an almost assured return scheme, giving high returns with no perceived risk, the panel had observed.

The panel went on to say that part of the current problems have been due to the excessively high yield offered by the scheme as compared to bank deposits. It alsocriticised the UTI’s continued promotion of assured return schemes — that too for the benefit of institutional investors — despite adverse past experience.

UTI’s decision to focus on equity investments has further exacerbated the problems. The panel has observed that the sharp increase in the share of equity in the asset portfolio has led to problems in meeting the dividend distribution policy.

Consequent to the reduction in debt as a percentage of total assets, the interest income as a percentage of total income has fallen from 81.3% in FY 1990 to only 29.3% in FY 1998. In order to continue its dividend distribution policy in the face of reduced interest income, the Trust was forced to book profits on its equity portfolio (essentially, the best, most liquid scrips had to be sold, leaving behind largely illiquid scrips) in order to meet dividend obligations. The percentage of profits booked to total income has risen sharply from 13.1% in 1990 to 62.5% in 1998.

This story is likely to be repeated inthe current year as its investments in equity have gone up from Rs 13,647 crore last year to Rs 15,188 crore by December 1998. This constitutes almost 80 per cent of the corpus of the US-64 scheme. Except for the shares of pharma, software and consumer goods companies, other scrips have not made much headway in the last one year.

Meanwhile, it is learnt that the proposal to increase the capital of the UTI by Rs 500 crore is facing stiff resistance from other institutions who originally contributed to the capital. The trust had recently sent out letters to a host of companies like HDFC, Hindalco and Nestle demanding a representation in their boards. Speculation is also rife that the UTI may also insist on more board representation in IDBI and ICICI as well. The UTI chairman P S Subramaniam has termed this as a measure to enforce corporate governance. Simultaneously, it is also bringing in more outsiders in its asset management companies to add weightage to its argument for more representation on corporateboards.