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UTI may seek govt bail-out

Tamal Bandyopadhyay

Unit of Trust of India chairman M Damodaran has mapped out a four-pronged strategy to reinvent the beleaguered mutual fund behemoth and restore investor confidence.

The four prongs are- moving the government for infusion of funds at a later stage if share prices don't gain significantly; paring the total corpus of the Trust to a manageable size (so UTI won't sell any more US-64 units, either now or after January 2002) and setting up an asset management company to run the fund; splitting the US-64 scheme into two or three schemes and hiring on fixed-term contracts a few professional fund managers by paying market-related salaries.

What is more, UTI will be coming under the purview of the Securities and Exchange Board of India from January 2002. Finally, UTI has also started transferring out some of the senior executives who have "long been holding sensitive positions," Damodaran said in an exclusive discussion with Business Standard on Tuesday.

To send a signal to employees that the voicing of different opinions will be welcomed, Damodaran has already brought back general manager AK Sridhar- who was shunted out to a zonal office after he strongly recommended that UTI not pick up Cyberspace shares- to a crucial position at UTI headquarters.

In his first interview since the Central Bureau of Investigation arrested former UTI chairman PS Subramanyam and two other senior UTI executives, Damodaran said candidly: "There are problems on two fronts- liquidity as well as solvency. The liquidity problem can be taken care of by the banks' line of credit. But the government has to step in at the second stage to address the huge solvency issue, if by that time the market does not pick up." In other words, the government will have to bail out UTI.

He also said bluntly that UTI cannot continue to be the conscience keeper of the markets. "If there is a problem on the solvency front and the government is not forthcoming with money, we need to play in the market." He said that UTI had a lot of illiquid stocks, which it wants to dump at the earliest. "At the bottom, there are a whole lot of illiquid stocks. They are not big companies. We will negotiate with the promoters for a fair price. If they don't respond, we will sell the stocks to others and they may end up losing management control," he said.

Damodaran explained that apart from the US-64 scheme, which will open a repurchase window on August 1, three other schemes including the Children's Gift Growth Fund are due for redemption next year. "We will get a clear picture (to what extent government support is needed) by mid-August," Damodaran said.

The chairman has already proposed to the finance ministry a plan to amend the UTI Act and set up an asset management company. "The Trust needs to keep an arm's length from the AMC, which should manage the fund. Given a choice, I would like to downsize the entire corpus. It's not a question of more debt or less equity in US-64. We must shed fat and downsize the Trust to a manageable level," Damodaran said, adding that the US-64 scheme could be split into two or three different schemes. "We are working on the plan. It's not yet ready," he said.

Damodaran said he did not feel that the arrests of the former UTI chairman and the senior executives would have a negative impact on investors as well as UTI employees in the long run. "It's part of a cleaning process long overdue. There is no panic now. I believe in empowering people. They must take decisions without fear. We have already brought Sridhar back to a key position," he said.

Sridhar will replace S K Saha, the general manager who oversees investments. Saha in turn will replace S K Dasgupta, chief general manager, marketing, who has been transferred to Madras. "I am in favour of shifting executives who have been holding sensitive positives for too long," he said.

"We are recasting all internal committees by bringing in outsiders. Even the board of the Trust will be recast. We will bring in people on the board who will be in a position to devote more time to UTI," Damodaran said. He has already kicked off the initiative by bringing in Jaimini Bhagwati, joint secretary, capital markets division, on the board in place of NS Sekhsaria of Gujarat Ambuja.

He is also in favour of paring the chairman's investment powers. "The UTI chairman is not a fund manager. Why should he sanction investments? Let others do it," he said. At present, the UTI chairman can take investment decisions valued at up to Rs 400 million.

The new UTI chairman has also given a mandate to placement agencies to look around for fund mangers. "We will hire a few fund managers on contract, offering them market-related compensation packages. We also need to beef up the equity research cell," he pointed out.

To tide over the temporary liquidity crisis, a line of credit from the banks has already been tied up. "We have arranged funds at 10 per cent interest, against stocks as collateral. We are offering the banks a margin of 40 per cent. We may need around Rs 15 billion to meet the redemption pressure. But we already have unused credit to the extent of Rs 9 billion," Damodaran said.

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