UNIT TRUST OF INDIA

A Discussion on US - 64

INTRODUCTION

1963: Established by an act of Parliament, set up, regulated and administered by Reserve Bank Of India.

1964 launched first mutual fund scheme, Unit Scheme-1964 (US-64).

1978 delinked from RBI and IDBI took the regulatory and administrative control.

OBJECTIVE

To stimulate and pool the savings of the middle and low income groups.

To enable unit holders to share the benefits and prosperity of the rapidly growing industrialization in the country.

To sell units among as many investors as possible.

To invest the money raised from the sale of units and its own capital in corporate and industrial securities.

To pay dividend to the unit holders

SCHEMES

UTI has introduced two kinds of units in the market:Ordinary units (Face value of Rs. 10 each)Capital units (Face value of Rs. 100 each).

The units are not traded on stock exchanges but they are liquid.

UTI fixes repurchase prices of units and is always ready to buy them from investors.

OPEN ENDED UNIT SCHEMES

Unit Scheme – 1964 (Flagship Scheme)

Unit Scheme – 1971

Unit scheme for charitable and religious trustsand societies,1981

Capital Gain unit scheme, 1983

Children’s gift growth fund unit scheme, 1992

Housing unit scheme, 1992

Senior citizen unit plan, 1993

CLOSE ENDED UNIT SCHEMES

Monthly income unit schemes, issued in 1987, 1988, 1989.Growing income unit schemes, issued in 1987, 1989, 1990Deferred income unit schemes, issued in 1990, 1991, 1992

Capital growth unit scheme, 1991, 1992

US-64

Unit Scheme-1964: First scheme introduced by UTI

The fund’s initial capital of Rs 5 crore was contributed by RBI, Financial Institutions, LIC, SBI and other scheduled banks including few foreign banks

open-ended scheme, promising an attractive income, ready liquidity and tax benefits

In the first year, US-64 mobilized Rs 19 crore and offered a 6.1% dividend as compared to the prevailing bank deposit interest rates of 3.75 - 6%

By October 2000, US-64 increased its capital base to Rs 15993 crore, spread over 2 crore unit holders all over the world

PHASE ONE

30 June 1998UTI declares a dividend of 20% on US-64

1 July 1998UTI announces that reserves of US-64 have turned negative to the extent of Rs 1,098 cr.

4 October 1998UTI chairman P S Subramanyam declares his intention to sell equity holdings.

19 October 1998Finance ministry advises UTI to step up repurchase price of US-64 units and maintain its 20% dividend.

2 November 1998Finance ministry sets up a five-member committee under the chairmanship of HDFC chief Deepak Parekh

AIM OF THE DEEPAK PAREKH COMMITTEE:

To review the objectives, features and structure of US-64 scheme in the context of its role in the mobilisation of domestic savings and investment in the capital market. 

To review the policies of US-64 scheme relating to pricing and income distribution, having regard to the profile of existing investors of the scheme. 

To review the policies and procedures about the portfolio composition of the scheme as well as the asset management process.

PHASE TWO

2 July 2001UTI declares a 10% dividend on US-64 and announces suspension of sale and repurchase on the scheme for 6 months

4 July 2001Heat from the finance ministry forces UTI chief P S Subramanyam to resign.

11 July 2001SBI, Corporation Bank and other banks agree to provide a line of credit against collateral.

13 July 2001Government’s rescue package for the bail-out to be restricted to Rs 10,000 per investor while UTI declares it requires an infusion of Rs 3,000 crore to cover the principal amount and a dividend of 10% declared by Subramanyam. 

14 July 2001M Damodaran, joint secretary in banking division of the finance ministry, declared as the new UTI chief.

15 July 2001Finance ministry rolls out a Rs 300-crore rescue package which offers unitholders the opportunity to liquidate their holdings and achieve capital appreciation through a step-up repurchase till May 2003. Investors can offer up to 3,000 units for repurchase between August 2001 and May 2003. The repurchase price in August fixed at Rs 10 per unit to be increased by 10 paise every month.

19 July 2001UTI declares its intention to divest 25% of US-64's equity holding

VISION OF UTI CHIEF DAMODARAN

moving the government for infusion of funds,

paring the total corpus of UTI,

splitting US-64 into 2-3 schemes

hiring professional fund managers.

25 July UTI chief M Damodaran maps out a four-pronged strategy to restore investor confidence:

MALEGAM COMMITTEE

12 October 2001The Y H Malegam committee, set up in June 2000, recommends a strategic partner for UTI.

25 October 2001In its report on corporate repositioning, the Malegam Committee recommends against any government role in UTI restructuring.

27 October 2001Malegam Committee recommends that UTI should completely dispose of the equity investments in assured return schemes. The equity content in such schemes is in the range of 15-20%.

3 NovemberThe Malegam Committee report recommends RBI and LIC to convert their holdings and form a sponsoring company.

FINALLY

27 December 2001UTI decides to reduce the equity portion of US-64 from 61% to 55% and raise the debt proportion to 75% of total assets.

28 December 2001First time in the history of US-64, UTI declares its provisional portfolio to the general public.

31 December 2001UTI declares the first NAV of US-64 at Rs 5.81, which is 44% lower than its repurchase price of Rs 10.5 for January 2001.

FLAWS IN FUNCTIONING

UTI sold investors the apple (of a balanced fund) as an orange (an income fund)

positioned as an income scheme

UTI never told its investors that the portfolio composition

The steady decline in the dividend yield was never highlighted. The yield on July price for 2000-01 of 7.4 per cent was close to the levels that prevailed 30 years ago.

BIFURCATED STRUCTURE

Specified Undertaking Of UTI controlled by Government of India and does not come under the purview of Mutual Fund RegulationsUTI Mutual Fund Ltd. (sponsored by SBI, PNB,BoB & LIC) regitered under Sebi and functions under Mutual fund regulations.

UTI MUTUAL FUND

UTI Trustee Co. Pvt. Ltd. Appointed UTI Asset management Co. Ltd. For managing the schemes of UTI mutual fund and schemes transffered from erstwhile Unit trust of India.

UTI Asset Management Co. LtdUTI International (offshore funds)UTI Ventures(venture funds)UTI Retirement Solutions (pension funds)

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