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Malegam charts fair deal for US-64

P Vaidyanathan Iyer

The Malegam committee has said that the asset management company of the Unit Trust of India, in its restructured avatar, should compensate Unit Scheme-64 for taking over its infrastructure and organisation by issue of bonds. The quantum of bonds would be decided when UTI is converted into an AMC.

The panel, which submitted the report on corporate repositioning of UTI to the joint parliamentary committee probing the stock market scam, has recommended that after UTI converts itself into an AMC, the existing infrastructure and organisation of UTI which presently form part of US-64 would become the infrastructure and organisation of the new AMC.

Hence, US-64 should be compensated through the issue of bonds carrying a rate of return which is linked to the market rates. The redemption terms should be determined taking into account the AMC's expected cash flows. The Trust's fixed assets, which currently have a book value of Rs 8.50 billion, would be valued at their fair market value and bonds would be issued for that amount.

The proposed AMC would manage the funds of all UTI schemes and charge them management fees. This income, after payment of expenses and interest on the bonds to be issued to US-64 would be transferred to the development reserve fund which should be sufficient to service the share capital which has been pegged at Rs 10 billion.

The committee has also said that US -64 should be net asset value (NAV)-based before the restructuring of UTI is attempted. However, before US-64 becomes NAV-based, provision should be made for contingent liability arising out of any gap between the available assets of the scheme and guaranteed price to individual unit holders holding up to 3,000 units.

The committee has also suggested that UTI be valued as a whole by an independent valuer. The valuer should take into account the goodwill of the institution built over the last three-and-half decades and also the low operating costs as a percentage of investible funds. It should also keep in mind the contingent liability arising out of assured return schemes after adjusting the balance available in the development reserve fund.

The strategic partner should subsequently be invited to quote the value at which UTI's infrastructure and organisation should be converted into the AMC. If this value exceeds the value of the assets of the various schemes, the excess should be apportioned appropriately to the various schemes.

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