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Govt set to ask UTI sponsors to meet MIP gap

Subhomoy Bhattacharjee

The government is expected to ask the three sponsors of the Unit Trust of India to meet the shortfall in its Monthly Income Plans.

The decision will be conveyed to the Industrial Development Bank of India, Life Insurance Corporation and State Bank of India, which will have to come up with a plan to bail out the beleaguered mutual fund.

The issue was firmed up in the board meeting of the Securities and Exchange Board of India on Thursday.

The government had asked the Sebi board to decide whether the three institutions, which are the sponsors of UTI, could also be construed as sponsors of the Trust's assured returns schemes.

Coming out of the board meeting, Sebi chairman GN Bajpai said: "we will ensure that the interests of the investors are protected".

He declined to go into the specifics. According to an estimate prepared by UTI, the total shortfall in its 11 MIP schemes, maturing between April 30, 2002 and May 31, 2004, works out to Rs 33.88 billion. For MIP 97, the shortfall is Rs 4.61 billion.

Asked when Sebi would inform UTI, Bajpai said, "we will inform UTI well in advance". He also said that it was for UTI to come out with the final announcement on the redemption plan for the MIPs.

UTI had run into problems with its full term assured return MIP schemes because the rates of returns that it had offered on these schemes were much more than the prevailing rates on its investments.

As a result, it has a redemption problem, which it cannot meet even from its Development Reserve Fund.

The liquid funds available in the fund as on December 31, 2001 was only about Rs 600 million.

UTI has maintained that its assured returns schemes were launched only after clearance by Sebi.

Under Sebi's mutual funds regulations, a guaranteed scheme can be launched only if it is fully guaranteed by a sponsor. However, LIC, IDBI and SBI have so far claimed that they are not the sponsors of these schemes.

Finance Minister Yashwant Sinha has also recently said that the government is not in favour of any bailout for UTI unlike what it had done for US-64.

IDBI, SBI and LIC are sponsors of UTI because the Mutual Funds Regulations, 1996 (Section 2X) of the Securities and Exchange Board of India, defines a sponsor as "any person who acting alone or in combination with another body corporate, establishes a mutual fund".

Government sources said IDBI's arguments that Sebi's MF regulations do not cover funds set up before 1996, do not hold water as Canara Bank was earlier forced to make good the Rs 6.5 billion shortfall in the assured return schemes of Canstar even though the latter was established well before 1996.

The government pumped in Rs 6.5 billion into Canara Bank to help it meet the Canstar liability.

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