The US-64 Controversy

RESTORING THE TRUST

TABLE I
HOW THINGS WERE SET RIGHT

• PSU shares were transferred to a special unit scheme (SUS'99) subscribed by the government in 1998-99.

• Core promoters such as the Industrial Development Bank of India added around Rs 450 crore to the unit capital, thus helping to bridge the reserves deficit of Rs 2,800 crore in 1998-99.

• Portfolios were recast in the current quarter to capitalise on the stock surge as the BSE Sensex rose by 15%. Greater weightage was given to stocks such as HLL, Infosys, Ranbaxy, M&M and NIIT.

• In US-64's case exposure to IT, FMCG and Pharma stocks rose from 20.45% to 22.09%. This was replicated across funds. Between June 1999 - September 1999, 21 out of UTI's 28 schemes have outperformed the Sensex.

• UTI has become more proactive in fund management. For instance, it bought into Crest at between
• Rs 200 and Rs 210 in October 1999. The stock was trading at Rs 340 in November 1999.

• Stocks like Visual Software, Mastek and Gujarat Ambuja have entered the top 50 equity holding list. Scrips like Thermax, Thomas Cook and Carrier Aircon are out.

• Complete exit from illiquid stocks such as Esab Industries. The divesture of around 83 stocks released an estimated Rs 300-500 crore of extra investible cash.

Source: Business World, November 29, 1999.

UTI constituted an ad-hoc Asset Management Committee^[6] with 7 members comprising 5 outside professionals and 2 senior UTI officials. The committee's role was clearly defined and its scope covered the following areas:

• To ensure that US-64 complied with the regulations and guidelines and the prudential investment norms laid down by the UTI board of trustees from time to time.
• To review the scheme's performance regularly and guide fund managers on the future course of action to be adopted.
• To oversee the key issues such as product designing, marketing and investor servicing along with the recommendations to Board of Trustees.

One of the most important steps taken was the initiative to make US-64 scheme NAV driven by February 2002 and to increase gradually the spread between sale and repurchase price. The gap between sale and repurchase price of US-64 was to be maintained within a SEBI specified range. UTI announced that dividend policy of US-64 would be made more realistic and it would reflect the performance of the fund in the market. US-64 was to be fully SEBI regulated scheme with appropriate amendment to the UTI Act.

The real estate investments made by UTI for the US-64 portfolio were also a part of the controversy as they were against the SEBI guidelines for mutual funds. UTI had Rs 386 crore worth investments in real estate. UTI claimed that since its investments were made in real estate, it was safe and it could sell the assets whenever required. However, the value of the real estate in US-64's portfolio had gone down considerably over the years. The real estate investments were hence revalued and later transferred to the Development Reserve Fund of the trust according to the recommendations of the Deepak Parekh committee.

By December 1999, the investible funds of US-64 had increased by 60% to Rs 19,923 crore from Rs 12,433 crore in December 1998. The NAV had recovered from Rs 9.57 to Rs 16 by February 2000 after the committee recommendations were implemented.