In the initial stages, UTI had been performing a hybrid role of both a financial institution and a mutual fund. However, over the last few years, its role as a financial institution has significantly diminished and it has positioned itself purely as the largest mutual fund in the country. There is also a significant trend emerging which suggests that financial institutions will gradually wither away or merge into universal banks. In this scenario, commercial banks and mutual funds will emerge as the primary institutions for the mobilisation of household savings. This reinforces the need for UTI to evolve as a pure mutual fund. At the same time, consideration has to be given to the fact that UTI has promoted and holds controlling interest in a number of institutions outside the pure mutual fund industry.

As noted earlier, UTI's management structure is at variance with the structure prescribed for mutual funds under SEBI regulations. These regulations provide for four separate entities, namely a Sponsor, an Independent Trustee, an Asset Management Company and the Fund. It is necessary that UTI as the largest player in the Mutual Fund industry should, as recommended by the Vaghul Committee, lend itself to SEBI's regulatory jurisdication and conform to the form of structure prescribed in SEBI regulations. As stated earlier, out of 73 domestic schemes, 67 schemes have already been brought under SEBI regulations and apart from US-64 and SUS-99, the remaining schemes have finally suspended sales and/or are nearing termination. It only remains for the structure of UTI also to be made SEBI compliant.

While the present structure of UTI provides for separate Asset Management Committees for US-64, equity schemes and for income/debt schemes, the degree of control exercised and direction imparted by these Committees appears to be restricted and inadequate. The key mandate of the Committees is to review performance of unit schemes of UTI and provide guidance. The Committees discharge this role of independent review of scheme performance through the mechanism of periodic meetings. Given the limitation of a "review committee" format, the Committees have not found it possible to resolve "embedded" problems stemming from "historical" decisions. The Committees, therefore, cannot replace Asset Management Companies. There is therefore need for an independent Trustee and an independent AMC, as provided under SEBI regulations with wider powers of control and direction.

UTI has no identified Sponsor but the institutions which contributed to the initial capital of Rs.5 crores and the additional amount of Rs.445.5 crores in 1999 may be considered as Sponsoring Institutions. SEBI regulations impose certain responsibilities and obligations on sponsors and it would be difficult to discharge these responsibilities and obligations when there are a large number of sponsors. It is therefore necessary that the Sponsor should be a separate company. It is suggested that this company can be formed with the initial shareholders being the Sponsoring Institutions who will convert the whole or part of their present holdings in the initial capital of Rs.5 crores and the additional contribution of Rs.445.50 crores made in June 1999 into the capital of the Sponsoring Company. This conversion can be made at the NAV of the units when US-64 becomes NAV based. It is desirable that no single member of the Sponsoring Institutions ultimately holds more than 25% of the ultimate capital of the Sponsoring Company, particularly since many of them already own or have participation in AMCs managing other mutual funds.

It is for consideration whether UTI should be wholly-owned and managed by the Government through participation in the Sponsoring Company. Although UTI is not directly owned by the Government, the majority of the Sponsoring Institutions who contributed to the capital and the additional contribution and who elect the trustees are institutions which are owned or controlled by the Government. The Chairman of the Board of Trustees is also appointed by the Government. There is therefore a public perception of a Government umbrella which gives a measure of safety, security and implied guarantee to the unit-holders which is largely responsible for UTI's success as a savings institution.

At the same time, this perception imposes an implied responsibility on the Government for a possible bail-out of UTI in the event of its failure to meet specific or implied commitments. Government did this by contributing to the SUS Scheme to the extent of Rs.3,300 crores following the recommendations of the Deepak Parekh Committee and there is a public perception that Government will need to do likewise to ensure that UTI will meet its commitments to US-64 unit holders atleast to the extent of 3,000 units out of their aggregate holdings.

Participation by Government in the sponsoring company may strengthen the perception of implied responsibility of the Government for the due fulfillment of obligations by UTI but this responsibility may be open-ended and Government may not wish to accept such a responsibility. However, non-participation by Government in the sponsoring company may not by itself remove the perceived link between the Government and UTI so long as Government continues to exercise powers such as the power to appoint the Chairman of the Board of Trustees under the UTI Act.

At the same time, it is necessary to recognise that if the perceived link with the Government is suddenly removed, - and certainly if it is removed before US-64 becomes NAV based - without providing an adequate substitute, public confidence in UTI would be severely affected and can even lead to a flood of redemptions which could create a crisis both in UTI and in the capital market. It is therefore necessary that if the Government does not participate in the Sponsoring Company, the participation of the Sponsoring Institutions should remain "locked-in" atleast for the initial period.

An option for consideration is whether in place of the Government a strategic partner cannot be introduced. If this partner is an established player in the market who enjoys confidence of unitholders because of his reputation and competence, the risk of loss of public confidence through the removal of the perceived Government link would be largely mitigated. At the same time, having regard to the large amount of funds involved, the field for the identification of a strategic partner cannot be restricted only to Indian entities.

If such a strategic partner is introduced, then it is necessary that Government should completely withdraw and leave it to the strategic partner to manage the fund subject to the supervision and regulation of SEBI as in the case of other mutual funds. To do otherwise would create the danger that Government may be perceived to be accountable for the proper functioning of UTI without having any effective control. If on the contrary, Government attempts to effectively control the operations of UTI, it will get unnecessarily involved in running a commercial operation for which it may not be able to impart the necessary skill and flexibility. A complete withdrawal of the Government would also achieve the objective of de-risking the Government from the operations of UTI.

A question for consideration is the size of the capital of the Sponsoring Company. This depends upon two major factors namely, the contribution which the Sponsoring Company is required to make to the Capital of the Asset Management Company and the amount of funds the Sponsoring Institutions are prepared to provide for this purpose. Taking into account both these factors, it is suggested that the initial capital of the Sponsoring Company to be contributed by the Sponsoring Institutions could be in the order of Rs.220 crores. The strategic partner could be required to introduce into the capital a sum of Rs.330 crores whereby of the total capital of Rs.550 crores, 40% would be held by the Sponsoring Institutions and 60% would be held by the strategic partner. The holding of the Sponsoring Institutions could be subject to a 'lock-in' of three years, though transfers between themselves would be possible.

SEBI regulations require the formation of a Board of Trustees or a Trustee Company. The usual practice is to form a Trustee Company which is owned by the Sponsor but the composition of whose Board of Directors conforms to SEBI regulations. It is suggested that a Trustee Company be formed as a wholly-owned subsidiary of the Sponsoring Company. SEBI regulations do not prescribe any minimum capital for the Trustee Company but having regard to the onerous responsibilities prescribed under the regulations for a Trustee Company, it is suggested that it has a capital of Rs.5 crores which will enable it to build up the necessary infrastructure to discharge those responsibilities.