The Unit Trust of India (UTI) is one hole in the government pocket that keeps getting bigger. The bill for the misdeeds at India's biggest and shakiest mutual fund has just been prepared: Rs 10,000 crore and rising. That's excluding the Rs 800 crore the Government has already granted to the UTI since July 2001, and is also in addition to a Rs 3,000-crore bailout for US-64, UTI's flagship scheme, in 1998.

To be paid over a period of two years, more than Rs 5,000 crore of the bailout money will go into meeting the Government's commitment to investors in US-64 which is now struggling to remain afloat. The balance Rs 5,000 crore may be needed to repay investors in 11 assured returns schemes like the Monthly Income Plans (MIPs) that are due for redemption by 2004. In all, UTI has 35 such schemes that may eventually need a bailout as large as Rs 20,000 crore when they mature in the next 7-8 years.

That the UTI's bad investments were a ticking time bomb was known since March 2001, when the stocks scam first came to light. But nobody had expected the blast to be so devastating. May 2003 could be the first big test when the UTI will have to fork out Rs 12 a unit to investors who holds less than 5,000 units of US-64 and Rs 10 per unit to those with more than 5,000 units.

BUSINESS

HOW MANY BAILOUTS WILL FILL UTI'S COFFERS CURRENT PROBLEMS: US-64's NAV is Rs 5.92 a unit against guaranteed repurchase price of Rs 12 in May 2003. Potential shortfall of Rs 5,500-6,000 crore. « 11 other assured return schemes maturing by 2004 have a shortfall of Rs 4,320 crore. « Its redeeming MIPs and assured returns schemes through Development Reserve Fund. DAMODARAN'S RESCUE PLAN: Strike deals with promoters of companies in which UTI has large equity holding to sell shares at a premium over market price. « Recover about Rs 3,000 crore of Rs 6,800 crore NPAs by cracking down on defaulters. « Sell its shares in PSUs being privatised at a premium to strategic buyers. GOVERNMENT IS CONTEMPLATING: Giving cash to UTI for buying government securities which can be sold when UTI needs money. « Asking LIC, GIC, SBI and Bank of India to bail out UTI by taking over its assets and eventually diluting their stake to strategic partner. IRDA opposed to this. « Bailing out UTI and asking it to address its problems once and for all.

Considering that the current value of a unit is around Rs 6, there will be a long queue for redemption. Long enough, some estimate, to wipe out most of the scheme's unit capital of close to Rs 12,500 crore. "Investors in US-64 are destined to move out in May 2003 if things remain the same. Add to this the liability on the assured returns schemes, and UTI is up against a wall," says Dhirendra Kumar, CEO of Delhi-based Value Research, a mutual fund industry tracker. "The Government will have to cut a fat cheque."

The shape, size and form of this cheque is the big issue right now. The UTI says it wants the funds right now, so that it doesn't have to liquidate its investments in the currently depressed stock market to service redemptions. The Government realises this. It first debated handing over large chunks of UTI's investments to a clutch of state-owned institutions like LIC, GIC and some public-sector banks, who would become the sponsors of UTI and subsequently sell a part of their stake to a strategic partner. But the insurance regulator has already declared that insurance firms shouldn't use investors' funds to bail out UTI. The other option being considered is to give cash to UTI for buying Government securities which could be sold when UTI needed money. If everything else fails, the Government will just have to give money to UTI to repay investors.

"We are not going in for a distress sale." M. Damodaran, Chairman, UTI

Earlier this year, the Government tried to wriggle out of its commitment saying that it was for UTI to meet its obligations and that it would pay no more than what it has promised for US-64. It put the ball in the court of the UTI's sponsors. The issue was referred to the Securities and Exchange Board of India (SEBI), which was asked to decide on who UTI's sponsor was. SEBI continues to sit on the crucial decision.

So far, UTI has redeemed MIPs that matured in the past few months by drawing from its Development Reserve Fund (DRF), which is a corpus contributed by various schemes to cushion a shortfall. The DRF was also forced to borrow from banks to meet the fund's obligations. That may not be possible anymore. As the uncertainty over timing and extent of the bailout prolongs, the UTI is losing investors thick and fast. The total investment in all the 60-odd UTI schemes has shrunk from Rs 76,547 crore in March 2000 to Rs 45,787 crore in July 2002.

VIEWPOINT

WHAT TO DO WITH UTI INVESTMENTS Be alert, not panicky In July last year, UTI shocked millions of investors when it froze redemptions in US-64. The crisis was averted after the Government announced a bailout package. But the problems at India's largest mutual fund are far from over. Here is what to do about your investments in UTI. US-64: Investors holding 5,000 units or less should stay put, as any downside is protected by an assured repurchase price. This is Rs 11.20 now and will rise by 10 paise every month till May 2003, when it will be Rs 12. Investors holding more than 5,000 units can still take a chance. UTI assures redemption of these units for Rs 10 in May 2003. If the NAV crosses Rs 10 before that, sell off. But this looks unlikely because the NAV is currently at Rs 5.92. Unless, of course, UTI gets the difference between the NAV and the assured prices before May 2003. After the ongoing overhaul of the portfolio and redemptions in May 2003, US-64 will evolve as a balanced fund, well suited for investors seeking long-term capital appreciation with greater stability than an all-equity fund. MIPs: All MIPs launched in 1997-98 assured fixed returns for all five years. UTI paid dividends for these schemes by dipping into its unit capital. Only a big surge in equities can rescue these funds. And many of these are beyond recuperation despite the recovery in the stock markets. While some MIPs promised a return of 13-14 per cent, a sharp fall in interest rates has only added to their woes. Besides, mounting bad debts, a deteriorating economy and inefficient businesses have compounded the problem. Most MIPs do not have the money for redemption though they guarantee the par value on repurchase. You have no choice but to stay put till redemption. Don't panic and exit now because the NAV will be substantially less than the face value. Equity funds: UTI's open-ended equity funds include Mastergain, Masterplus, Master Growth, Grandmaster, PEF, UTI Index Select Equity, UTI Master Index and UTI Nifty Index. The close-ended funds include eight Master Equity Plans, the Mastershare, Unit Scheme 92 and UTI Master Value Unit Plan. All these open-ended equity funds were launched as close-ended funds and later converted before redemption. Their portfolios were very diversified. This led to a below average performance in the long term. But relentless cleaning of these portfolios in recent times has helped them smarten up. UTI's attempt to encash the value of its holdings might act as a kicker and could benefit its equity funds. However, these funds will qualify as long-term growth vehicles only if they clearly state their objective and focus on it. Investors should stay alert. Uncertainty is the order of the day and we should be prepared for it. The author heads mutual fund tracker ValueResearch and can be reached at valueresearch@vsnl.com

The mutual fund's management led by Chairman Meleveetil Damodaran feels that cleaning up the mess at UTI would be possible only if the Government lends its support now. He has already introduced significant structural changes at the mutual fund in the past year.

One important change is that US-64 has turned NAV-based from January 1 this year. UTI has also disclosed complete portfolio of all its schemes for the first time in August. Many dud stocks have been offloaded. In US-64 alone, 300 such scrips have been shown the door and another 500 may be on their way out. US-64 now has a chief investment officer, a role that was played by chairmen and executive directors in the past.

Damodaran believes that UTI has more than a fair chance to beat the pack if its troubled past is taken care of. "If you address some of the historical problems, investors will stay on with UTI," he says. "Many of our schemes like the Master Value Unit Plan, Mastergain and Master Growth are among the top performers in the industry." Often perceived as being dead opposed to the privatisation of UTI, Damodaran, sources say, believes the mutual fund should be first nursed to health. Only then will the Government get the true value of its stake, he feels.

This is how he plans to do this. UTI has non-performing assets (NPAs) of Rs 6,800 crore. It is now aggressively pursuing its debtors by asking them to hand over post-dated cheques. When they default UTI takes action against them. Damodaran hopes to recover about Rs 3,000 crore, or 50 per cent of the dues, over the next couple of years from defaulters. A tough task indeed, given the track record of recovery in the Indian financial sector.

UTI has also decided to strike tough bargains with promoters of companies where it has large stakes. Six months ago when the Bajaj family group companies offered to pay a 25 per cent premium to UTI for its 9.5 per cent stake in Bajaj Hindusthan, UTI refused. In August it sold the same shares at a premium of 67 per cent over the prevailing market price. Its stake in fast-moving-consumer-goods major ITC alone could fetch UTI Rs 2,000 crore. It holds more than 10 per cent stake in almost 200 companies, enough for a promoter or an acquirer to think of paying a premium (see box).

Then there is the spate of PSU privatisations planned. An estimate puts UTI's holdings in the Shipping Corporation of India, NALCO, BPCL and HPCL at over Rs 3,000 crore. With share prices of psus rising by over 70 per cent since January 2002, UTI's holding of PSUs shares could yield rich returns on sale.

Industry sources say UTI could garner about Rs 8,000 crore through aggressive sales of its investments over the next two years. But that is not going to be easy. There are not too many good stocks in the market and if UTI sheds its blue-chip holdings what will it be left with? "We are not going in for a distress sale of our assets," declares Damodaran.

But UTI's plans will depend largely on the way the stock markets move since most of its schemes are heavily equity loaded. UTI, therefore, has to hope for a strong surge in the value of equities to boost its performance. India's largest mutual fund, which once moved markets, today finds itself praying for a return of the favour.