The Government in order to protect the interests of 20-million-odd investors of Unit Trust of India (UTI) announced a structural reform package, covering a Rs 14,561-crore bail-out for the US-64 and all assured return schemes and eventual privatisation of UTI's schemes.

To start with, UTI would be split into two entities - - UTI-I and UTI-II. UTI-I would cover the US-64 and the Monthly Income Plan (MIP) schemes, while the various net asset value-based schemes will be hived off to UTI-II. The latter would also include the units of US-64 issued after January 2002, when the scheme became NAV-based.

Further, while UTI-I will managed by a Government-appointed administrator and team of officially-nominated advisors, UTI-II will be headed by a professional chairman and board of trustees. The brand equity of UTI, too, will go with UTI-II, which will eventually be disinvested or privatised.

The bifurcation will be done through The Unit Trust of India (Transfer of Undertaking and Repeal) Bill, 2002, to repeal the UTI Act, the Finance Minister, Mr Jaswant Singh, told newspersons here after the Cabinet Committee on Economic Affairs cleared the UTI package.

Investors who redeem US-64 units even after May 2003 will continue to get the administered repurchase price of Rs 12 per unit up to 5,000 units and Rs 10 per unit beyond 5,000 units, following the Government's decision to provide open ended-support to old investors of the scheme. The move is expected to ease the redemption pressure in April and May 2003.

Tax concessions will be extended for the US-64 scheme - - on dividend income and capital gains - - to make it attractive for unit holders to remain within the scheme.

The Government will also reset the interest at a lower level in five MIP schemes, where only the principal amount is assured and the dividend can be reset. Foreclosure of some of the MIP schemes is also being considered, subject to this being permitted under SEBI regulations.

Both UTI-I and UTI-II would be structured as per SEBI regulations. The total asset value of all UTI-run schemes aggregates to Rs 42,000 crore as on June 30 - - Rs 17,784 crore for the NAV-based schemes and about Rs 25,000 crore for the US-64 and other assured return schemes.

"The decision to spilt the fund into two entities forms the crux of the structural reform package for UTI. The objective is to have a working, healthy mutual fund run by a professionally-managed team," the Finance Secretary, Dr S. Narayan, said.

According to him, the Government has now moved two steps forward after the decision taken by the CCEA last year to provide full assistance to the US-64 scheme. The first is the move to allow open-ended redemption for investors in US-64 and the second is the commitment to bridge the shortfall in the assured return schemes.

The current shortfall in US-64 is estimated at Rs 6,000 crore, of which the UTI has already been provided cash support of Rs 800 crore and another Rs 500 crore is in the pipeline. The projected liability of the balance Rs 5000 crore will be met through the issuance of bonds tradable in the market.

A similar mechanism will be worked out for assured return scheme where the estimated liability is around Rs 8,561 crore.

"The Government is fencing out the liabilities in the US-64 scheme and other assured return schemes. An investor who holds on to the US-64 unit beyond May 2003 can only sell it back to the UTI and it cannot be re-circulated in the market. We may, however, consider allowing these units to be recirculated at NAV," said Dr Narayan.

UTI-I would effectively cease to exist once all investors move out of the US-64 and the assured return schemes. The basket of assets and liabilities of UTI will be transferred to the two entities after the repeal of the UTI Act.

Commenting on the decision of the Government Dr.Kurian, Chairman, Association of Mutual Funds in India (AMFI) and former trustee of UTI. in an interview to Business Line Correspondent on 08.09.2002 has stated as under:

The UTI development is a welcome one and gives a positive signal to the industry, investors and market because the uncertainty with regard to solving the problem of the institution is over. Since 1998, UTI has been passing through a difficult situation. Than came the 2001 problem. Now, various committees and recommendations later, the problem has been solved. I think it is to the credit of the Government even though it has taken a pretty long time to do so.

PARLIAMENT has given its nod for the bifurcation of Unit Trust of India into two companies -UTI-I and UTI-II - with the Rajya Sabha on Tuesday giving its assent on 03.12.2002 to the UTI (Transfer of Undertakings) Bill, 2002 by a voice vote. The Bill has already been passed by the Lok Sabha.

Addressing the Rajya Sabha, the Finance Minister, Mr Jaswant Singh, assured that the Government would meet its commitments to the investors.

The Finance Minister said that UTI-I will not float any new scheme and all existing commitments would be met by the Government, while UTI-II would be started as a SEBI regulated, asset managed and market competing scheme.

He assured the House that there would be no retrenchment of UTI employees. "All of them would be put on the UTI-II attendance register with an option that they could take six months to decide if they wanted to take voluntary retirement."

UTI Mutual Fund has come into existence with effect from 1st February 2003. UTI Asset Management Company presently manages 42 NAV based domestic SEBI compliant schemes and 4 Offshore funds having a corpus Rs.15,243 crore from about 10 million investor accounts.