Till the opening up of the Indian economy in 1991, UTI had a virtual monopoly of the mutual fund industry and by 30th June, 1991 its total investible funds at market value had grown to Rs.24,536 crores. In 1993 the industry was opened out to private sector mutual funds and as of 30th June, 2001, domestic mutual funds other than UTI, had total investible funds of Rs.42,029 crores. Consequently, UTI's market share has declined from 84% in 1997-98 to 57% in 2000-2001.

With the formation of The Securities and Exchange Board of India (SEBI) in 1988 and its acquisition of statutory status, mutual funds became subject to SEBI regulation. In 1993, a three-member Committee of the Board under the Chairmanship of Shri N. Vaghul and with Shri S. H. Khan and Shri B. K. Jhawar as members, was formed to consider inter alia whether UTI should be subjected to SEBI regulation and if so, what special considerations would need to be built into the regulations to reflect UTI's special status.

The Committee noted that :-

1. UTI performed an important role in the national economy with regard to the mobilisation of savings of the community and the development of the capital market.

2. UTI had considerable strengths in terms of synergy, economies of scale, cost efficiency, investor confidence and return to investors which, together with the large size of its investible funds and investor accounts offered to the country a unique opportunity for shaping UTI into a diversified organisation that could effectively compete with international players in the emerging environment of globalisation of the Indian financial market.

3. The hybrid character of UTI's operations gave it a status of more than a mutual fund. The combination of equity, debt instruments and term loans in a single institution was certainly called for when the Indian economy was in the developmental stage.

4. There had, however, been a change in the economic scenario since 1991 with the introduction of the new economic reform package and contemplated reforms in the financial sector and the opening out of the sector to private sector players. The Government had accepted the broad concepts of free market economy based on the principles of competition, fair play and level playing field and it would therefore not be logical to exclude UTI's mutual fund operations from the regulatory jurisdiction of SEBI only on the ground that UTI was a hybrid organisation and the mutual fund operations could be separated only at a considerable cost to synergy and loss of investor confidence.

The Committee therefore recommended that :-

1. It would be in the interests of the UTI and UTI's investors if regulatory jurisdiction of SEBI is extended to UTI's mutual fund schemes;

2. UTI should form one or more Asset Management Companies, as may be necessary, as its subsidiaries to undertake the functions of management of mutual funds.

3. The existing schemes of UTI would fall into two broad categories viz "mutual fund" schemes and 'non-mutual' fund schemes. The management of the mutual fund schemes should be vested with the Asset Management Companies. UTI should however continue to manage the non-mutual fund schemes of which the most notable example was Unit Scheme 1964 (US 64).

4. Consequent on the recommendations, the organisational structure of UTI in its role as a financial institution would need to be revised.

Following upon the recommendations of the Vaghul Committee, UTI lent itself in 1994 to be under SEBI purview and governed by SEBI guidelines for mutual funds. Accordingly, all new schemes launched by UTI after July 1994 are governed and supervised by SEBI regulations and many schemes which were in operation on that date were either terminated or made SEBI compliant. Currently out of 73 domestic schemes in operation, 67 schemes are under SEBI regulations. Of the balance 6 schemes, 4 schemes other than US-64 and SUS-99, have suspended sales and/or are nearing termination.

The Indian capital market had experienced prolonged sluggishness for five to six years. There were also other adverse factors, for example, the political uncertainty caused by three successive elections, the sanctions imposed following nuclear testing, and the Kargil conflict. As a fallout of these factors, there had been adverse effects on the earnings of and the savings mobilisation by the mutual fund industry and UTI being the largest mutual fund in the country had to bear the major brunt.

These adverse factors had consequential effects on the stock markets with significant decline in share prices. In this phase of stock market adjustments, US 64 continued to maintain its income distribution, despite lower growth in its earnings and erosion in its investment valuations and did not adjust its sale and repurchase prices in the hope that stock market recovery would improve its position. Unfortunately while these "hopes" were belied, the absence of timely corrective action resulted in a growing gap between the Net Asset Value (NAV) and the sale/repurchase price of the units. UTI tried to reposition itself by restructuring the portfolio but in the absence of conducive market conditions, the correction process was slow. The situation was compounded by adverse media reports of the fall in reserves of US 64.

Therefore, in October 1998, UTI constituted a High Level Expert Committee under the chairmanship of Shri Deepak Parekh to undertake a comprehensive review of the functioning of US 64 to strengthen the scheme and to recommend measures for sustaining investor confidence.

The terms of reference of the High Level Expert Committee were as under:-

1. Review of the objectives, features and structure of the scheme in the context of its role in the mobilisation of domestic savings and investment in the capital market.

2. Review of the policies of the scheme relating to pricing and income distribution, having regard to the profile of existing investors of the scheme.

3. Review of the policies and procedures about the portfolio composition of the scheme, as well as the asset management process.

The High Level Expert Committee submitted its report on February 25, 1999 and the full report was made public on May 18, 1999. The recommendations of the Committee are enclosed in Annexure I. We are informed that of the 19 recommendations made by the Committee, 13 recommendations had been implemented and 3 recommendations were in the process of implementation. The remaining 3 recommendations on which action still remains to be taken are :-

1. US 64 should be NAV driven.

2. There should be a separate Asset Management Company for US 64 with an independent board.

3. The number of trustees should be increased by the addition of 5 trustees.

Implementation of the last two recommendations had to be kept pending as they needed an amendment of the UTI Act.

It is with this background that the UTI Board of Trustees at its meeting on July 3, 2000 set up a "Corporate Positioning" Committee.

The Committee had the following terms of reference :

1. To review the competitive positioning of UTI in the light of

   1. the second generation reforms in the financial sector.

   2. the emerging development in the area of mutual fund business and regulation as well as the trend towards broader financial services companies.

   3. globalisation of the Indian financial services sector.

   4. the confidence of investors in financial organisation of different sizes and strengths.

   5. obligations of UTI to the existing unitholder under UTI Act and the implications of any change in this context and

   6. progress of implementation of recommendations of the Deepak Parekh Committee.

2. To recommend appropriate follow up action plans including amendments to connected legislation for enabling UTI to fully meet with the Mutual Fund Regulations of SEBI and enhancing the competitive positioning of UTI.

The Committee had several meetings and had almost concluded its deliberations when the UTI Board, at its meeting held on 2nd July, 2001 announced that it had suspended the sale and repurchase operations in the US-64 scheme till December 31, 2001. This created an immediate outcry and loss of confidence of unitholders in UTI and demands for Government intervention and support. To meet the demands for liquidity and some amount of safety for small unitholders, UTI announced on 15th July, 2001 that unitholders would be offered an option for repurchase upto 3,000 units out of their aggregate holdings during the period upto 31st May, 2003 at prices which would progressively increase from Rs.10 to Rs.12 per unit. It was also announced that US-64 would be made NAV driven from 1st January 2002. The reason for the suspension of sale and repurchase operations was stated to be the fact that in April 2001 and May 2001, US-64 faced massive redemptions aggregating to Rs.426 crores and Rs.3,767 crores respectively at the then repurchase prices which were later admitted to be well above the Net Asset Value of the units of the Scheme. Sales and repurchase in the scheme had been stopped with effect from 1st June 2001 for closure of books prior to payment of dividend for the year ended 30th June 2001.

How the public outcry resulted and its aftermath are discussed in the next articles. The specifc recommendations of the "Corporate Positioning" Committee are given later