Recommendations of the Corporate Positioning Committee

1. The structure of UTI should be in line with SEBI regulations as applicable to mutual funds. Accordingly there should be a

   1. Sponsor,

   2. a Trustee Company and

   3. an Asset Management Company (AMC).

2.  

   1. The Sponsor should be a Sponsoring Company in which 40% of the share capital should be held by the institutions which hold the initial capital of UTI of Rs.5 crores and which have made in 1999, the additional contribution of Rs.445.5 crores pursuant to the Deepak Parekh Committee recommendations.(the Sponsoring Institutions).

   2. 60% of the share capital of the Sponsoring Company should be held by a Strategic Partner who is a recognised player in the market and whose reputation and competence are expected to give the required degree of confidence to the unitholders. The field for the selection of the Strategic Partner need not be restricted to Indian entities.

   3. The suggested share capital of the Sponsoring Company should be Rs.550 crores of which Rs.220 crores will be subscribed by the Sponsoring Institutions and Rs.330 crores by the Strategic Partner. To make the desired contributions, each of the Sponsoring Institutions should convert part or whole of their existing holdings in Unit-64 forming part of the initial capital of Rs.5 crores and the additional contribution of Rs.445.5. crores into shares of the Sponsoring Company.

   4. As some of the Sponsoring Institutions also own AMCs which manage mutual funds competing with UTI, no single Sponsoring Institution should hold more than 25% of the share capital of the Sponsoring Company.

   5. To ensure that the confidence of the unit-holders should not be adversely affected by a sudden withdrawal of the Government umbrella, there should be a 'lock-in' period of three years during which the Sponsoring Institutions may transfer their shareholding in the Sponsoring Company amongst themselves but not to the Strategic Partner or to third parties.

3. A Trustee Company should be incorporated as a wholly-owned subsidiary of the Sponsoring Company. It is suggested that the Trustee Company should have a capital of Rs.5 crores.

4.  

   1. UTI should convert itself into an AMC and consequently the existing infrastructure and organisation of UTI which presently form part of US-64 will become the infrastructure and organisation of the AMC.

   2. The AMC will compensate US-64 for the infrastructure taken over by the issue of bonds carrying a market rate of return and with appropriate redemption terms to be determined taking into account the AMC's expected cash flows. For this purpose, UTI's fixed assets which currently have a book value of around Rs.850 crores will be valued at their fair market value and bonds will be issued for that amount.

   3. The capital of the AMC should be adequate not merely to finance the investment needed in the future infrastructure but also to provide a cushion as a source of comfort to the investors and when needed, an ability to infuse liquidity into the fund in the event of a crisis. It is therefore suggested that the AMC should have a capital of Rs. 1000 crores considering that UTI has investible funds of over Rs.50,OOO crores.

   4. It is necessary that control over the large funds held by UTI (and particularly having regard to the large block of shares held by UTI in individual companies) should not rest with a single individual or group. It is also necessary that there should be an element of public accountability of UTI. It is therefore suggested that the shareholding of the Sponsoring Company in the capital of the AMC should be restricted to 40% and the balance 60% should be offered to the public.

   5. In accordance with SEBI regulations, the AMC would be entitled to charge management fees to the different schemes. This income, after payment of expenses and interest on the bonds to be issued to US-64 and transfer to the Development Reserve Fund at the current rate should be sufficient to service the share capital.

   6. There should be a single AMC to manage all the schemes of UTI.

5.  

   1. It is necessary that US-64 is made NAV based before the restructuring of UTI is attempted.

   2. It is also necessary that before US-64 is made NAV based, provision is made for the contingent liability arising out of the gap, if any, between the available assets in US-64 and guaranteed price to individual unitholders' holdings upto 3000 units announced in July 2001.

6.  

   1. It is equally necessary that provision is made for the contingent liability arising as a result of the gap between the present value of the future liability

   2. To reduce the size of this gap, the following steps should be taken

      1. The portfolios of these schemes should be recast as soon as it is practically possible, to ensure that the portfolio consists only of Government securities and debt instruments and all investments in equity are disposed off.

      2. b) In respect of schemes where only one year's return is assured, the returns assured should be strictly in line with the earning capacity of the schemes.

      3. The Income Tax Act should be amended to provide that dividends received on assured return schemes floated before 1st June 1999 would not be entitled to exemption of tax under Section 10(33) and correspondingly, no tax would be levied on the fund under Section 115R on dividends distributed to unitholders.

   3. (iii) The Development Reserve Fund should be transferred to the AMC free of consideration after valuing the investments of the fund at their fair market value.

   4. sub-number omitted

   5. The prospective Strategic Partner should 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 schemes, the excess should be credited to the various schemes in an appropriate manner. If however the value falls short of the value of the assets of the schemes, the shortfall, if not met by the holders of initial capital of UTI and/or Government, will need a reduction of the benefits under the assured return schemes in an appropriate manner.

7.  

   1. The UTI Act should be repealed and replaced by a new enactment. In enacting this Act, it should be ensured that the Government is totally distanced from UTI and transaction costs (e.g. stamp duties, taxes etc.) are minimised, if not eliminated and the 5wnership of the assets vests in the AMC at the lowest possible cost.

   2. If the UTI Act were not to be repealed but merely amended, there is a danger that the Government may be left with residual responsibilities under the Act, which would result in a public perception of continued Government accountability. In such a situation, it may become necessary to give UTI a fully Government character with senior-most positions in UTI being manned by Government officers. Clearly this is not a preferred outcome but it is mentioned only to emphasise the fact that accountability cannot be divorced from day to day management responsibility.