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The Rediff Business Special/ Nikhil Faleiro

'No one wants to recommend UTI to any investor'

The UTI saga: Genesis of a controversy

Blueprint for restoring lost glory

After months in a semi-coma, UTI staggers to its feet

End of a Dream?

This is the fifth and final part of The UTI Saga.

Has the dream ended? On July 2, 1999 when Unit Trust of India chairman P Subramanyam announced the annual results for the country's premier mutual fund and declared the dividend for the US-64 scheme, there was little surprise in the grandiose rooms of Bombay's Taj Mahal hotel.

While many expected a higher dividend in a desperate bid to retain the small investor, the pessimists outweighed the optimists who had expected the dividend to be on par with the NAV (Rs 10).

With no options left and no reserves to fall back on -- thus negating the attempt to declare a high dividend -- UTI was on a firefighting mission to save itself. As Sridhar Narayan, head of equities at ITC Threadneedle AMF, says, "No one wants to recommend UTI to any investor. The dream is over. Now private mutual funds will witness a growth of investors who will want better returns.''

Reducing the dividend for US-64 as well as the July resale price from Rs 14 to Rs 13 may have been an extremely hard decision for UTI to take, keeping in mind its large investor base. But it was the right decision; the board of trustees could have not taken a more prudent stand considering the difficulties the fund faces. The cut in dividend marks a major change in UTI's policy which it had followed even at the cost of its survival.

UTI has always maintained a policy of increasing or declaring a stable dividend since its inception. This is only the second time in the scheme's 35-year history that it has cut the dividend. The first time was in July 1996 when the dividend was slashed from 26 per cent to 20 per cent. The reduction was then accompanied by a 1:10 bonus to compensate for loss in income.

This time around there is no pretence; the only shield the mutual fund has used is that it is following the Deepak Parekh committee's recommendations.

So what does the future hold for the fund that has sustained and fed millions of small investors throughout the country for the last 35 years?

There is no denying that UTI's tough stand to reduce the dividend and align it with the net asset value is in the interests of both investors and the trust. However, the fear that any harsh reduction would lead to an exodus of investors and a possible public outcry seems to have weighed heavily on the board of directors, thus leading to a small gain in the dividend.

But has that been sufficient to appease small investors who have poured billions of rupees of their hard earned savings into UTI on the premise that it would continuously declare a high dividend?

Says Devina Mehta, a BSE stockbroker, "the best time to have got out was last year when at least the Rs 75.13 billion that flowed out of the scheme would not have been at the cost of the investor who opted to stay or invest.''

This is true today because those who move out will get more than their fair share while those who stay will subsidise investors who exit. For those who stay any increase in the NAV on account of an improved performance may not necessarily translate into proportionate gains. However, despite the negative views about the fund, there is no denying that UTI still enjoys strong brand equity.

During the past year, when the fund went through its worst crisis, it saw fresh inflows of Rs 45.96 billion through 500,000 fresh applications. This is one reason why the fund did not go the whole hog and introduce NAV pricing into practice. As Subramanyam said about the reduction in dividend, "it is a one-time correction. Investors will appreciate the fact that we have turned the reserves from negative to positive in such a short time. Now they can be bullish as the scheme is only going to look up.''

The MF has tried to regain investor confidence by promising to achieve this goal of NAV pricing over the next two years. Will that be sufficient to retain millions of small investors. "No,'' says BSE broker Rakesh Sharma, "today what you earn is very important -- not your history nor your promises of a grand future. Investors want to see firsthand what they are going to earn. You disappoint them once and it is all over.''

Despite UTI's attempt to cover up some major errors of the past, it has not convinced investors that its crisis is over. So what if the negative reserves turned positive and it had enough funds to pay a dividend of Rs 1.62? So what if US-64 mobilised Rs 45.96 billion in 1998-99? So what if annual sales were up by 18% to Rs 155.05 billion and its turnover increased by 29% to Rs 304.35 billion? The small investor has been hurt.

Says Subramanyam, "we are confident and bullish about the fundamentals of the economy. If an investor puts money in units he can expect a similar return (Rs 1.35) next year. Now that the correction has been done we expect a large number of investors to come into US-64 and other UTI schemes. We offer trust and returns.''

Sensing investor ire, the fund is going all out to implement the Deepak Parekh Committee recommendations to give its beleaguered portfolio a fresh lease of life. The equity portfolio is being revamped and scrips from high return companies such as FMCGs, pharma and infotech have been added. UTI plans to double its investible funds over the next three to four years which will take its corpus from Rs 610 billion to Rs 1.2 trillion.

But as Manish Shah, vice-president, Gold Crest Securities, says, "unless they re-introduce the old dividend, the small investor, the widower and the pensioner will not be happy. These people made UTI but today UTI is ignoring them. That is their biggest mistake.''

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