Rs 1,000 Crore Govt Cover For Uti Schemes

The government will extend a guarantee of Rs 1,000 crore to the Unit Trust of India to meet the redemption pressure on its monthly income schemes maturing at the end of this month.

The guarantee, which has been approved by finance minister Yashwant Sinha, will support UTI to ensure that its attempts to securitise its assets in its development reserve fund realise a much better value and also reduce the cost of its borrowings. UTI has been asked by the Securities and Exchange Board of India to dip into the development reserve fund to meet the shortfall in its monthly income schemes.

Ministry officials said the guarantee could not be construed as a bailout unlike the Rs 3,300 crore pumped in for the Unit Scheme 1964 in 1999.

Then, the government had securitised the public sector shares held by UTI. But the guarantee now extended would become operative only if UTI fails to garner the resources needed to meet the redemption pressure. The guarantee will, however, show up in the Centre's Budget liability as an express financial commitment.

UTI faces a shortfall of almost Rs 1,000 crore on its three schemes that mature at the end of this month. These include the Monthly Income Plan 1997 (II), IISFUS 97 and Monthly Income Plan 95. Of these, the largest shortfall is in Monthly Income Plan 1997(II) because it was launched with the promise of a full-term assured return and protection of capital on maturity. But with a reduction in the level of the benchmark interest rates for the economy, the scheme ran into an asset-liability mismatch. It is part of the 16 assured-return schemes launched by UTI between 1997 and 2001 that have begun to mature from April this year.

Monthly Income Plan 1995 is a non-assured scheme where the final maturity price is fixed based on the net asset value on the maturity date, and carries no protection of capital at the time of termination.

While UTI had initially said its sponsors, LIC, IDBI and SBI, should offer a lifeline to it, the Sebi directive forced it to look for alternatives, including selling assets held in the development reserve fund. Consequently, it had asked the Centre to stand guarantee for the development reserve fund.

Sinha has repeatedly said the government would ensure that investors in the UTI schemes would not be shortchanged. The guarantee will help UTI to also raise resources for the next scheme, Monthly Income Plan 1997 (III), which matures at the end of August.