Repositioning Uti
Historically, the UTI enjoyed a total monopoly for the first 25 years of its existence; thereafter it faced intense competition from much smaller nimble players. The conscious choice that UTI was required to make was whether it would accept an inevitable drop in its market share or fight a battle of attrition to retain its overwhelming share of the market. The macho spirits within the UTI opted for the latter. If the UTI tenaciously holds on to its market share, its chain of command will get very thin and it will end up picking up poor quality business.
Ideally, the UTI should have been broken up into three separate units viz, US-64, which is a hybrid scheme, the equity schemes and the debt schemes. The UTI has long since crossed the rubicon and the authorities want it to remain a monolith. Nonetheless, the UTI should give early attention to family planning and curb the proliferation of schemes. To start with, multiple monthly income schemes are not an efficient way of functioning and all these schemes should be merged into a single open-ended scheme. The UTI should, as a matter of principle, not offer a guaranteed rate of return under any scheme even for one year; such a guarantee is the very antithesis of a mutual fund. Again, the equity schemes need to be brought together under the banner of the UTI Mastershare which should be made open-ended. Much as UTI officials argue that all the schemes are separate, in actual practice it is difficult to keep their operations distinct and at the same time the schemes cannot compete in the true sense of the word. After all the buck stops at the same poor UTI chairman. Again, all the Master Equity Plan schemes need to be merged into a single scheme, when the three-year period is over each of the present schemes should be terminated and the investor should have the option of switching over to the single scheme.
The US-64 is quite clearly the flagship scheme and it is here that the UTI faces its acid test. The Deepak Parekh Committee gave an outer limit of three years for the scheme to go over to an NAV basis. It would not be necessary to await the Malegam Committee report before moving on to an NAV. After all, what is important is that the NAV should be close to the repurchase price at the time of the switchover. The UTI lost an opportunity a few months ago to smoothly implement the transition. Quite apart from moving over to an NAV basis, the public does not even know the NAV as of June 30, 2000. One knowledgeable observer puts it at Rs 14.10 (Business Standard, July 17) while another equally knowledgeable observer puts it at Rs 13.625 (Hindu Business Line, July 29). While there would no doubt be good reasons for the differences, after the dividend of Rs 1.375, the NAV is clearly below the repurchase price.
All the UTI needs to do is to undertake the transition as soon as the NAV is slightly above the repurchase price. It is obviously not desirable to announce the transition date well in advance and to avoid speculative purchases it should not be undertaken proximate to the year ending June 30. The UTI will always have a fear of flying its flagship scheme but the plunge has to be taken. If the UTI is uncomfortable with sharp swings in the NAV it should quickly implement the Deepak Parekh Committee recommendation to reduce the equity portfolio to 50 per cent. The adverse impact of a fluctuating NAV can be exaggerated. Hard core loyalists do not enter and leave the US-64 because the NAV fluctuates. Let me bare a personal experience. I had an investment of Rs 20,000 in US-64 and to meet a commitment I encashed it 20 years after investment. To my horror, the capital loss after indexation was Rs 50,000. I am sure readers would be appalled at my naivete that despite this punishment, when my cash position improved, I promptly put back the Rs 20,000 into US-64.
The moral is that the UTI should not be excessively concerned about adverse investor reaction to fluctuations in the NAV. So long as the repurchase price is above the NAV the UTI is running a Ponzi Scheme and shrewd investors would jump ship. But the bulk of investors are not driven by such considerations and as such the UTI should have no fears of moving over to an NAV system for US-64.
At a July purchase price of Rs 13.50, the yield works out to 10.2 per cent which is not all that attractive. The UTI should curb its enthusiasm to raise the dividend sharply. Loyal investors put a premium on a very gradual increase in the dividend and make adequate provisions rather than high but widely fluctuating dividends. The UTI should use favourable times to strengthen the portfolio and make adequate provisions rather than fritter away resources in unsustainably high dividends.
The UTI Act is an anomaly in the context of the SEBI Act and the time is apposite to simply abrogate the UTI Act; there can be no half-way house on this issue. The UTI is meant to be the fund manager par excellence and the gilt market is by far the largest segment of the financial market. While the UTI has moved towards entering the field of financial services it has missed the bus by not recognising that it should have been one of the first applicants to become a primary dealer (PD) in government securities -- better late than never!
In the context of globalisation of Indian financial services it is unbecoming that the Reserve Bank of India (RBI) Exchange Control continues to drag its feet over the investment by all mutual funds of a puny investment abroad of US$500 million. This is not a matter of erudite exchange rate policy but a mental block in the Exchange Control. Because of unconscionable delays the RBI is losing valuable time on the learning curve.
Lastly, what is most important is that the UTI should very quickly move over to internationally accepted transparent accounting norms. The UTI could not have called for a better pair of hands than Y H Malegam.