Structural Change Crucial

While the UTI has been set up as a statutory organisation, the UTI Act is anachronistic in a milieu in which the Sebi is the regulator of all mutual funds. There is, therefore, a pressing need to amend the UTI Act to provide for an omnibus provision that whenever the UTI Act is in conflict with the Sebi Act, the Sebi Act shall prevail.

The UTI Act merges the asset management and trustee functions, and given the way the UTI is structured, all powers of investment/ disinvestment decisions lie with the chairman/executive trustee. Such centralisation of powers is not only inefficient but dangerous.

In the absence of structural checks and balances, a weak system of governance has prevailed and these weaknesses have been all pervasive, covering not only investment/ disinvestment decisions but also the accounting and management information systems. Accountability has been, therefore, somewhat weak and indeterminate.

The UTI has made heroic efforts to meet the aspirations of its mass body of investors, of a reported 20 million account holders in US-64, but the structural weaknesses have thrown up crises from time to time. Patchwork solutions have met the immediate crises but the malady lies in its structural weaknesses and unless these are addressed the UTI will be punctuated with recurring crises.

The present structure smacks of an incestuous relationship... and the board of trustees is considerably weakened by the consanguinity of the trustees as representatives of regulators (government and the RBI) and rivals (banks and financial institutions). It is not surprising, that in such a milieu, the operations of the UTI have been hamstrung. The committee is fully conscious of the self-fulfilling prophecies, but without sounding alarmist, the committee unequivocally emphasises that unless the UTI is subjected to a total structural overhaul in the next 12 months, the intensity of the next crisis could be cataclysmic. The authorities need to recognise that investor confidence has been shaken and for a quick restoration of confidence, a decisive and expeditious structural revamping of the UTI is imperative.

There should be a formal separation of the asset management and trustee functions, with the setting up of three separate and distinct asset management companies. Each of these can be entrusted exclusively to US-64, the income schemes and the growth schemes. The separation of the asset management function into three separate entities is necessary, as at present, even with its reduced assets as of July 2001, the UTI has total assets of Rs 54,233 crore or 54.8 per cent of the total assets of all mutual funds of Rs 98,969 crore.

The setting up of three AMCs and the formal separation of asset management and trustee functions should be in place by July 1, 2003 and the UTI should be fully Sebi compliant by this date. There should be firewalls among the three AMCs, as also between the three AMCs and the board of trustees. No trustee should be on the AMC, and there should be no common officials between the trustee and the AMCs as also among the three AMCs. The role of the board of trustees should be to supervise the three AMCs and to ensure that the operations are strictly in accord with the Sebi stipulations and in the best interest of the unit holders.

Pending the setting up of AMCs, the three asset management committees should be immediately empowered to simulate the functions of the AMCs. This should be done before US-64 moves over to an NAV basis and in any case, before the end of December 2001. To the extent necessary, the present asset management committees will need to be immediately reconstituted. The board of trustees should have a full-time chairman as also a full-time executive trustee, and the other trustees should be independent and have experience from different disciplines, viz., accountancy, law, management and economics and have knowledge of the working of mutual funds. It would be best to avoid chairmen of banks and financial institutions from being ex officio trustees.

The three AMCs should each have a separate board with a chairman and a chief executive officer, both of whom should be full-time. The chairman could be assigned responsibilities of overall superintendence of the company... and the CEO should be in-charge of the day-to-day operations. Each AMC should have its own independent set-up, including a strong research unit. There should be well-defined delegation of powers, particularly on investment/ disinvestment decisions, and a clear, coherent and transparent investment policy which should be documented. With clearly demarcated AMCs, the three units would have totally independent policies and the problem of questionable inter-scheme transfers would thus be largely obviated.

Any inter-scheme transfer of assets among schemes covered within an AMC would require fully documented double coincidence of wants and would need to be approved by the board of the AMC. Furthermore, to the extent inter-scheme transfers are permitted between two AMCs, both the boards should approve the transfer. These measures would ensure transparency and bonafides of inter-scheme transfers.

The argument that the present structure of trustees and asset management functions is cost effective is a non sequitur. Although it economises on senior management, such savings are deceptive, as it has heavy costs in terms of poor governance. Hence, the UTI should not hesitate to increase its total staff to adequately look after the interests of the unit holders. The decision making processes in the UTI need to be subjected to a close scrutiny. The way the present delegation of powers is set out does not give scope for a