BOMBAY, 1 July — Unit Trust of India (UTI), India’s largest mutual fund, is planning on changing its logo, hoping probably that the change would help bring about a change in its fortune.
UTI has decided to go in for a modern and contemporary look. The objective is to gvie UTA a new face. Ironically, instead of improving from within, UTI is banking on its new logo for improvement! The market share of UTI has slipped to 47.6 percent from 51.1 percent in the last two months and UTI saw net outflow of Rs. 22.7 billion in May. Private mutual fund players have taken advantage of the situation and have eaten up the UTI share from 40.7 percent to 44.1 percent.
During the past few days, there has been a lot of speculation regarding its ability to meet redemption pressures. Two of its Monthly Income (MIPs) schemes are maturing on the June 30 and it was widely assumed that UTI would not be able to pay back the investors. Of these schemes, the largest shortfall is likely in MIP 97(II) because it had been launched with the promise of a full-term assured return and protection of capital on maturity.
Last month, UTI had drawn Rs. 6.2 billion from Development Reserve Fund (DRF) to meet the shortfall in its MIP-97. This reduced the DRF corpus to just Rs. 9.5 billion and due to this it was known that UTI did not have enough money to meet the shortfall of the other two assured return schemes. The two schemes together were reported to have a shortfall of around Rs. 9.8 billion. While the shortfall for MIP-97 (II) is around Rs. 7.4 billion that for IISFUS ‘97 is around Rs. 2.4 billion.
But now there is news that UTI has managed to clear its liability on all the three schemes maturing on June 30. In fact it has already despatched checks to investors in the three schemes — MIP-95, MIP-97 (II) and Institutional Investors Special Fund Unit Scheme 97. The total outgo was over Rs. 3,000 crore.
How did UTI manage to raise the funds? Over the past few weeks, UTI has been one of the biggest sellers on the Bombay Stock Exchange. Faced with massive redemption pressure on its monthly income plans, UTI was selling the shares of various companies in the market. At the same time, it was also planning to sell either entire or a part of its stake in which UTI is either the promoter or co-promoter. These include UTI Investor Advisory Services, UTI Institute of Capital Markets, UTI Investor Services Ltd., UTI Securities Exchange and UTI Bank.
UTI has confirmed that it has borrowed Rs. 1,000 crore from the State Bank of India at a rate much below the bank’s prime rate on the back of a government guarantee of Rs. 1,000 crore. The government has given this guarantee to meet the shortfall in its three assured-return schemes maturing on June 30 and one on Aug. 31.
On April 30, UTI redeemed MIP-97, drawing down Rs. 617 crore from its development reserve fund. The government is likely to shell out at least Rs. 500 crore to support the redemption of the Unit Trust of India’s monthly income plans (UTI).
Senior government officials said the trust had already sent a proposal to the Finance Ministry and this was being considered. They said the government was, however, in no hurry because the immediate pressure on the trust to ensure the redemption of the assured-return schemes maturing at the end of this month have been met.
UTI’s woes do not end here. It has got a total of 16 assured monthly income plans (MIPs) and a fixed-return scheme of which the two above mentioned MIPs and the fixed-return scheme have managed to meet the deadline of June 30.
Between October this year and June 30 next year, when UTI’s financial year ends, four more MIPs will mature and the shortfall could be at least Rs. 700 crore, according to an internal UTI estimate.
And now the news is that UTI has already started negotiating with the government for yet another bailout as it would not be able to handle the redemption pressure as the fresh infusion into DRF which was expected to be only around Rs. 75 crore per annum. It is also learned that the government is also holding discussions with the financial institutions to step in as sponsors after recasting UTI.
Analysts, who have seen the makeup of UTI’s assured return scheme portfolios, say many of their investments are in doubtful debt. These funds have been invested in poor quality bonds, many of whose issuers turned defaulters, which in turn has resulted in unrecoverable credit. It is estimated that the total shortfall for UTI’s 16 MIPs is more than 35 billion rupees. Analysts say between 3.81 and 41.63 percent of the assets in UTI’s various MIPs are “non-performing”.
While UTI has been able to meet redemptions of this month, the moot question is — would they be able to meet the redemptions of the other MIPs? It will all probably depend on the markets or possibly on some more government support.
