The Rise and Fall of US-64

Introduction

The Unit Trust of India (UTI) came into existence on the 1st of February 1964, through the UTI Act, 1963. Unit Scheme 64 (US-64) was launched as per the provisions of the UTI Act. The scheme was a great success and was considered an essential investment by most middle class Indians. At its peak, the scheme had around 20 million investors. But in the late 1990s, UTI went from crisis to crisis. Government efforts to restore the fund’s past glory proved abortive. For the first time in 2001-02, UTI did not offer any dividend to its unit holders. Following a top management reshuffle, the process of winding up US-64 began.

History

Early History

The origin of Unit Trust of India (UTI) went back to the time of union minister T.T. Krishnammachari, who had seen a news item about the formation of a government-sponsored unit trust in Pakistan. In September 1963, after Krishnammachari took over as the Finance Minister, the government machinery began to move speedily on the Draft Bill to set up UTI 1. The Lok Sabha passed the Bill, on 5th December 1963 and the Rajya Sabha, a week later. It received President S.Radhakrishnan’s consent on 30th December 1963 and became UTI Act, 19632.

The Unit Scheme 64 (US-64) was launched on the 1st of July 1964. This was the first scheme in the country to channel public savings into non-deposit instruments like equity and corporate debt. Reserve Bank of India (RBI) and a host of other banks and financial institutions contributed to the initial capital of Rs. 5 crores. (See Exhibit I)

Initially the units were sold at Rs.10 per unit and a minimum of 10 units had to be bought. The sale of units at Rs.10 was to close by the end of July 19643. Thereafter investors could enter the scheme at the sale price and leave the scheme, as and when they wanted, at the repurchase price. US-64 was an open ended, non-assured income scheme structured as a balanced fund4. It could lend to companies and also invest in real estate. The scheme could also borrow from the RBI by way of repo5 deals in government securities to meet its liabilities.

1 See Annexure 1 for the definition of a Trust. 2 Section 3 of the Unit Trust of India Act, 1963 had provided for the establishment of UTI by the Central government through a notification in the Official Gazzette. Accordingly, the government published GSR 173 dated 31st January 1964 in the Gazette of India and UTI was born on 1st February 1964. 3 It was extended by two weeks on the insistence T.T. Krishnammachari. 4 The preamble to the scheme states “ A Unit Trust operates on the principle of spreading the risk. It invests its funds in a balanced and well distributed portfolio of investments”. A balanced fund includes both debt and equity to strike the right balance between interest income and capital appreciation. 5 Repurchase Agreement: An agreement between the buyer and seller in the sale of securities to reverse the transaction in the future at a specified date and price. The difference between the sale price and purchase price, provides the return to the investor. 2

There was a stipulation in Section 21 of the UTI Act 1963 regarding the lower limit on unit prices of Rs.10 per unit. This gave rise to the idea that the repurchase price of units would never fall below Rs.10.

In 1965, the stock market was bearish. It looked as if the Net Asset Value (NAV) 6 based sale and repurchase prices for units at the beginning of UTI’s second year (in July 1965) would go below the ‘par’ value of Rs.10 per unit. The government wanted to popularize US-64. A repurchase price of below Rs.10 per unit, it was felt, would shake the confidence of the investors. UTI decided to maintain a repurchase price of at least Rs.10.

Soon, it became clear that an amendment to UTI Act 1963 was necessary, to empower the Board of Trustees to make use of reserves to vary the prices for sale and repurchases of units as and when necessary. A new sub clause 5 was added in Clause 8 of US-64 to permit this. Using this provision, UTI made a block offer in July 1965, for a few weeks, priced at Rs.10.15 per unit when the NAV of the unit was Rs.10.45 per unit.

Till 1968, this special sales price (SSP)7 was marginally below the NAV based price. In the next six years, the margin8 fluctuated between - 7.5% and -19.5% of NAV based price. In 1975, an effort was made to bring the SSP in line with the NAV based price. After 1975, the SSP again began to go well below the NAV based price. Margins crossed -20% at some points of time, and reached -32.5% in 1985. Beginning 1st July 1981, UTI sold units at throwaway prices for the next 16 years. This policy of selling at prices below the NAV seemed to violate the business principles that had been envisaged under section 9 of the UTI Act, 1963 and the preamble to US-64. Investors who had purchased units at higher prices before the block offer period were put to disadvantage.

In the 1970s and 1980s, a combination of favourable circumstances strengthened UTI. Following the introduction of the Foreign Exchange Regulation Act (FERA) 1973, blue chip multinationals had to dilute their stakes. Institutions like UTI were given firm allotment of these shares (up to 2 %) at par value. The value of these scrips multiplied manifold over the years. There was also the convertibility clause in loan agreements and bond issues of Indian companies. Under this clause, the loans given by institutions were converted into shares at very low prices compared to the market quotes. These shares became a source of income for UTI in the years to come.

The 1990s

US-64 was a phenomenal success in the first three decades of its existence. During the period 1965-1995, the number of units held by the investors grew from 1.87 lakh units in 1965 to 15,277 million units in 1995 (See Exhibit II). Corporate investors and various trusts invested substantial amounts of money into the scheme. The units gave a good yield vis a vis other comparable securities in the market. Also being an open ended fund, corporates could enter and leave the fund as and when they wanted. The government boosted the sale of units by announcing a tax concession in the 1990-91 budget. The dividends received by a company from investments in other companies, including UTI, were completely exempt from corporate income tax, provided the dividends declared by the investing company were higher than the dividends received.

6 See annexure 2. 7 The price at which units were sold during the block offer period in July every year. 8 Percentage difference between the special sales price and the NAV based price. 3

The liberalisation of 1991 brought about a fundamental transformation in the investment scenario in India. Allotments of blue chip shares at low prices dried up. At the same time, the composition of the fund also began changing (See Exhibit IV). One important reason was the disinvestment of equity holdings in public sector enterprises by the government of India. These were taken up heavily by the Financial Institutions (FIs) including UTI. From nearly 64% of the fund in end June 1987, the debt component fell to almost 26%9 in June-2000. UTI did not inform investors that because of the altered portfolio, the fund was now vulnerable to stock market sentiment. Meanwhile, to meet its dividend commitment, US-64 kept selling its high yielding, long-term debt. So its interest income fell as well.

Although analysts considered the two chairmen, G.S. Patel (1977-83) and M.J. Pherwani (1984- 90) to be market-savy (The latter even came to be known as a "bull"), they had kept US-64, a balanced fund. The equity component did not go beyond 30 %. It was under S.A. Dave (1991- 96), a career development banker and former Chairman of the regulatory body, the Securities Exchange Board of India (SEBI), that US-64's investments became tilted heavily in favour of equity (70:30).

In hindsight, UTI made several wrong investment decisions in the early 1990s. It invested huge amounts in government securities but the interest movements turned adverse. UTI also invested heavily in commodity stocks in industries like petrochemicals and steel. The value of these investments declined steeply. For example, UTI purchased Reliance shares at Rs. 385 in late 1994, investing Rs. 770 crores. Four years later, the value of the investment had come down to Rs. 425 crores.

Dave’s successor, G P Gupta reportedly spent Rs. 1000 crore to prop up the market, which looked like it would crash after India’s nuclear explosion on May 11 and 13, 1998 and the resultant US sanctions. Reports suggested that Gupta did his best to keep the finance ministry happy. However, he only ended up burning his fingers when the markets crashed.

Meanwhile, efforts to restructure UTI proved abortive. In the mid-1990s, the idea of turning UTI into a company, which would be widely held by a group of banks and institutions, with a completely independent board, fully accountable to SEBI was mooted. This company would sponsor two or three asset management companies to manage the different funds. There was also a proposal to list US-64 on the NSE. But these proposals were not implemented.

UTI’s dividend policy became increasingly unsustainable over time. Dividends (See Exhibit V) were as low as 6.1% in the first year of US-64 but had risen gradually to 10% by 1979-80. After this, the rate of increase was faster. By 1990-91, the Trust was paying a dividend of 19.5% and by 1992-93, 26%. UTI’s high reserves enabled it to continue paying 26% till 1994-95. Many private funds came into the market in the mid-1990s and began competing for the same investors as UTI. The Trust realized it had to keep paying high dividends, to attract new investors. In any case, UTI found lowering the dividend unpalatable. In the mid-1990s, UTI sold a large number of blue chip MNC shares to part-pay its dividends. With the markets on the decline, the reserves, which were Rs. 6,083 crore in June 1995, dropped to Rs. 1,978 crore by June 1997. But to retain investor confidence, UTI decided to maintain a dividend of 20% in June 1998.

Over the years, the difference between bank interest rates and the payouts under US-64 had increased. While the difference had been 1-2 % in the '70s and 3-4 % in the early '80s, it had

9 UTI’s response to this was that there were hardly any good companies entering the market with debentures. 4 increased significantly in the '90s. While the bank interest rate was 10-12 % between 1992 and 1995, US-64 paid out 26 % dividend.

According to the UTI Act, UTI could invest only upto 5% of total investible funds or 10% of the securities issued and outstanding of the company. Over the years, UTI launched many more schemes and this regulation covered all of them. Through its various schemes, UTI had a considerable holding in companies. When it decided to sell shares, to remain within the ceiling, the market would start going down unless there was a strong rally. Not only did the NAV of US- 64 go down but other schemes of UTI also suffered.

UTI also found it very difficult to manage the large number of schemes it had launched and keep track of the prices of all the scrips. UTI had purchased many scrips because of pressure from the various central governments over the years to prop up the markets.

As a senior RBI official put it, 10

“Just as the IMF is pressed into service internationally to prop economies artificially, the government has been pressing UTI into service.”

While the book value of US-64's equity portfolio went up from Rs. 7,942.58 crore (June 1994) to Rs. 13,626.53 crore (June 1998), the market value during the same period actually declined from Rs. 18,377.86 crore to Rs.10,028.85 crores. It seemed more money was pumped into equity while its market value kept falling. At the same time, good stocks that had appreciated were sold to pay the dividend.

During 1997-98, US-64 declared a 20 % dividend payout on the basis of its interim results and income of Rs. 3,222 crore. The payout was Rs. 3,125 crore. However, between 5 May 1998 and 30 June 1998, US-64 suffered a sharp depreciation of Rs. 3,655 crore in the value of its equity investment. This was due to a sharp decline in the stock market index triggered primarily by the imposition of US sanctions.

The Deepak Parekh Committee

On September 30, 1998, a shocked investing public came to know that the reserves of US-64 had turned negative by Rs 1098 crore. The pressure for redemption from investors increased sharply.

Basudeb Sen, then a senior UTI official recalled11,

"From October 1998, redemption pressure built up and till December it aggregated Rs3,753 crore of US-64 capital. But there were additional sales also of Rs2,878 crore. Thus the unit capital came down from Rs15,629 crore (June 1998) to Rs14,754 crore (December 1998). The net effect was Rs875 crore. At this part of the year it normally is much less. During the three months to December 1998, over 30 lakh accounts were handled by our offices."

10 Faleiro, Nikhil. “1998-99 Results turn money market's focus back to UTI,” www.rediff.com, 2nd July 1999. 11 Joseph, Lancelot. “Restoring Trust,” Business India, 5th April 1999 – 18th April 1999. 5

By honouring all redemption requests, no matter what the amount was, UTI regained investor confidence. But gradually, UTI realised it would be impossible to cope with a flood of redemptions.

"We hit upon the idea that, in order to regain investor confidence, there was need to undertake a comprehensive review of the functioning of US-64 as a whole,"

- Explained12 P.S. Subramanyam, then chairman of UTI.

A committee, headed by the highly respected chairman of Housing Development Finance Corporation (HDFC) Deepak Parekh, was formed in October 1998. The other members of the committee were RBI deputy governor and former UTI chairman Jagdish Capoor, National Securities Depository Ltd chairman S.H. Khan, former State Bank of India chairman M.S. Verma, senior economic advisor to Government of India (GOI) Arvind Virmani, and Mumbai- based chartered accountant Rajendra Chitale.

From October 30, 1998 onwards, the committee held several rounds of discussions with various experts connected with the capital market, besides officials from the finance ministry, RBI and SEBI. The committee made 19 recommendations.

Some of the important ones were:

1. UTI should follow a rational dividend policy with respect to US-64. UTI should reduce its dividend rate.

2. Dividend paid to unit holders, should be tax free.

3. The original promoters should bring in additional funds of at least Rs.500 crore to bail out UTI. The major promoters of UTI put Rs.445.5 crore into US-64 in 1999. Of this amount, IDBI13 provided Rs.250 crore, LIC Rs.74 crore, State Bank of India and its subsidiaries Rs.56.5 crore and the balance was put in by other scheduled banks and financial institutions.

4. The committee wanted the stocks of Public Sector Units (PSUs), FIs and banks to be transferred from US-64 to a special fund called Special Unit Scheme (SUS-99) at book value, which in November 1998 was Rs.4800 crore against a market value of Rs.2800 crore. The Government was to be issued special units of SUS-99 worth the book value. In turn, it would give dated securities of the same value, which would be exchanged for the PSU, FIs and bank stocks in the US-64.14.

5. The committee recommended shifting to NAV based pricing by March 2002. If this was not done, the Trust would be left with no other choice but to seek the government’s support again.

12 Joseph, Lancelot. “Restoring Trust,” Business India, 5th April 1999 – 18th April 1999. 13 The relationship between RBI and UTI came to an end when the Public Financial Institutions Laws (Amendment) Act of 1975 came into force. The RBI’s initial contribution was taken over by IDBI. 14 Initially, the transfer was to the tune of Rs.4800 crore, which was then reduced to Rs.3300 crore having a market value of Rs.1528 crore. As a result, the NAV improved from Rs.7.04 per unit to Rs.9.1 per unit. In 2003, the government raked in around Rs.900 crore with the redemption of 20% of SUS-99. 6

6. Separate and independent teams of fund managers for each scheme and a separate Asset Management Company for US-64 with an independent Board of Directors had to be created.

7. The scheme had to be brought under the purview of SEBI.

8. The committee felt the asset management function was highly centralized and needed to be changed. The UTI chairman had excessive powers when it came to clearing investment decisions.

9. The committee suggested a strategic sale of significant holdings to the highest bidder to realise the best value for the unit holder.

The committee recommended a two-pronged strategy -- to increase UTI’s capital and to restructure the scheme by hiking the debt component. In line with the recommendations of the Deepak Parekh Committee, UTI shuffled 80% of the corpus of US-64 into 50 top performing scrips.

The restructuring under SUS-99 was also completed. UTI started managing the 26 scrips of PSU companies against which bonds were issued to it. The government wanted UTI to manage the scrips proactively and generate good returns.

During 1998-99 and 1999-00, UTI paid dividends of 13.5% and 13.75%. The reserves which showed a negative balance of Rs.1098 crore on September 30, 1998, improved to a negative balance of Rs.150 crore by the year end. Thanks to the surge in equity markets, the reserves were a healthy Rs 3580 crore as on December 31, 199915. UTI’s revival was reflected in an SEBI- NCAER16 investor survey which reported that bank deposits were considered the safest, followed by gold and UTI’s US-64 and other schemes.

US-64 reported a net income of Rs.1364 crore during the six months ended December 2000. Coming in the face of a turbulent equity market, which saw the Sensex fall by over 16% over the same period, this was considered a commendable performance by most analysts. Amidst the widespread volatility in debt and equity markets, investors at large reposed faith in US-64. Unit capital moved up from Rs 15,146 crore in June 2000 to Rs 15,993 crore17 in December 2000. In the nine months ending March 2001, 2,65,000 new holders had joined the scheme.

The recurrence of a crisis

15 Pandya, Aabhas. “Should your money be in US-64?” www.rediff.com, 23rd June 2000. 16 National Council for Applied Economic Research. 17 Kumar, Dhirendra. “Unit Scheme-1964,” Value Research, www.rediff.com, 31st May 2001. 7

On 28th February 2001, UTI managed funds amounting to Rs.64,250 crore or more than 13% of the market capitalization of the Bombay Stock Exchange. It was around this time that some serious bungling seemed to have taken place. UTI accumulated substantial holdings in what came to be known as the K-10 scrips. These were companies in which leading stockbroker Ketan Parekh had made big investments. While Parekh withdrew from these scrips, UTI continued to hold onto them. In a private placement exercise, UTI picked up 3.45 lakh shares of Cyberspace Infosys18 at a price of Rs.930 when the market price was Rs.1100. The price of the stock later fell to Rs.11.

UTI also accumulated significant stakes in unlisted entertainment and media companies, acquired at prices between Rs.250 and Rs.500 per share. This again seemed to be an attempt to mirror Ketan Parekh’s strategy. After moving out of K-10 stocks, Parekh took a fancy for the stocks of unlisted media and entertainment companies. Most of these companies like Rathikanth Basu’s Broadcast Worldwide and Sanjay Khan’s Numero Uno International put their Initial Public Offer (IPO) plans on hold, blocking UTI’s exit route.

Soon, UTI’s links with Parekh and its investment decisions attracted widespread criticism.

According to one report19,

“It seems strange that a market player with UTI’s clout had to follow Ketan Parekh’s lead into companies in the Infotech, Communication and Entertainment (ICE) domain, that it has chosen to sell its holdings in old economy favourites like Nestle and HLL that were acquired at bargain prices; that its debt portfolio is riddled with instruments that could so easily turn out to be duds, that it holds equity, acquired at a cost, in unlisted media and entertainment companies, that do not stand a chance of listing anytime soon.”

But Subramanyam refuted allegations of a nexus with Parekh20,

“The perception (of a link with KP) exists because the media says there is something called K 10. UTI looks at each company’s worth in terms of perception, business model and research reports and puts it all together. These scrips were moving fast, every other mutual fund was investing in them (and so did we).”

In April 2001, reports began to appear in the press that UTI was repurchasing units at Rs.14 per unit, significantly above the NAV21. UTI seemed to have repurchased units worth as much as Rs.4200 crore at that point of time. But on July 2nd, 2001, UTI’s board of trustees, after a meeting in Delhi’s Le Meridian Hotel decided to stop the repurchase of units for 6 months. Liquidity had been one of the prime attractions of US-64. Many felt that by stopping the repurchase, UTI had totally betrayed the trust of millions of investors. By 12 p.m the next day, Subramanyam, was asked to leave by the Ministry of Finance.

In hindsight, UTI seemed to have delayed the transition to NAV linked pricing. The Parekh Committee had given UTI three years. But instead of holding on till the last moment, UTI could well have taken the plunge much earlier. From a negative position, reserves had increased to Rs

18 Cyberspace Infosys added Infosys to its name to benefit from the infotech boom of the late 90s. 19 Business Today, 6th May 2001. 20 Business Today, 6th May 2001. 21 UTI did not declare the NAV of US-64 back then. In fact, NAV was jokingly referred to as Not Available Value. 8

130 crore in June 1999 and Rs 5,300 crore (before distribution of dividend) in June 2000. The Sensex was up; the US-64 portfolio had, in fact, outperformed the Sensex significantly. In hindsight, the best time to link the scheme to its NAV was when the NAV of the scheme was greater than the repurchase price. This was the case in June 2000, when the NAV at Rs.13.44 (See Figure 5) was greater than the repurchase price at Rs.13.20. According to some reports, Subramanyam felt the difference was not enough. He wanted to wait till the NAV was even higher. Subramanyam’s reading was that the Sensex would touch 6,000 by Diwali. Armed with newly-acquired new economy scrips, he wanted to move to NAV-based pricing with a bang at a figure much above the repurchase price. Unfortunately for him, the markets crashed.

Meanwhile, UTI’s poor investment decisions and the lack of transparency in its operations began to get wide coverage in the press.

According to one report22,

“In the past two years, away from public scrutiny, protected by the fortuitous absence of norms requiring disclosure, fund managers at India’s most venerable mutual fund could have sunk large sums of money into outfits that can at best be described as struggling and at worst, as veritable black holes for money… Sometimes the managers of UTI merely flouted the fund’s own internal norms: that appears to have been the case with Binani Zinc. At other times, as in the case of Cyberspace Infosys, there appears to have been a complete and flagrant violation of all established rules. In yet other cases, if insiders are to be believed, the erstwhile top management ignored the advice of UTI’s own departments and went ahead with the investment.”

The report added that that a good portion of UTI’s investible funds remained virtually untrackable. Fund managers had too much leeway to invest without worrying about the consequences.

There were also reports of unethical behaviour. According to one such report23, qualified researchers had been repeatedly asked by senior management to change unfavorable recommendations that they had made on C-grade companies. The report also mentioned that some personnel had been transferred to unimportant departments because they failed to be pliant enough. There were also stories of how the Chairman himself would suggest changes to be made on certain recommendations.

Meanwhile, the crisis at UTI had led to a mass exodus of talented managers. In the 1990s, UTI had become a favorite for graduates from the country’s top B-Schools. MBAs were willing to spend a few years at UTI, even though the salary was not attractive, to gain the experience of working in India’s biggest mutual fund. But many had left in response to the turn of events.

A note on UTI24, written in mid-2002 for the Group of Ministers of GOI a high-power group comprising finance minister Jaswant Singh, disinvestment minister Arun Shourie and Planning Commission deputy chairman K.C. Pant, summed up the situation. The Note classified the schemes into three broad categories, the US-64 (asset size Rs 8,029 crore as on 30 June 2002), Assured Returns Schemes (Rs 17,010 crore) and Normal NAV based schemes (Rs 17,784 crore).

22 Business World, 6th August 2001. 23 Business World, 6th August 2001. 24 Khanduri, Manish and Anand, M. “Extent of the rot at UTI,” Business World, 2nd September 2002, pp. 36-38. 9

The note mentioned: "While the NAV-based schemes are reported to be performing satisfactorily, the real problem lies in US-64 and the Assured Returns Schemes."

The note, added that US-64 had been “much more than lavish” in its treatment of unit holders. It had made preferential (1992) and rights (1993 and 1994) offers, and declared a bonus (1996, in the ratio of 1:10). It had continued to declare high dividends all through the 1990s without "actual commensurate earning" - 20% and 26% being the highest and lowest declared in these years. At the same time, the equity component of US-64 had increased from 28% in 1991-92 to a high of 70% by 1997-98. The sale and repurchase prices had been25 "fixed at artificially high prices without any correlation to the intrinsic strength of the scheme". The note added that some investments were not of good quality and had not been made on commercial considerations.

In the wake of the crisis, UTI assured unit holders having 5,00026 or less units that their units would be redeemed any time between 1 August 2001 and 31 May 2003. (See Exhibit VIII). The incentive to hold on was the promise of Rs 12 for every unit worth Rs 10 if it was redeemed in May 200327. For holders having more than 5,000 units, UTI had guaranteed a price of Rs 10 or the net asset value (NAV), whichever was higher. The NAV was Rs 5.92 as on 22 August 2002.

At the time of preparing the note, UTI had estimated the shortfall to be around Rs 5,522 crore. UTI requested an upfront government grant, which did not come through. But in September 2002, the government finally announced a bailout of Rs.15,000 crores and a major restructuring of the beleaguered institution. The assets of UTI were divided into UTI-I and UTI-II. The government took responsibility for UTI-I, which had US-64 and all the assured return schemes. UTI-II 28 had all the NAV based schemes that would be managed by professionals. Plans were announced to disinvest it to the private sector at a future date. UTI-I continued to repurchase units of US-64 even after May 2003. The first 5000 units were bought back at the rate of Rs.12 per unit and the remaining at the rate of Rs.10 per unit. Alternatively, investors were offered 6.75% tax-free US- 64 bonds in lieu of their investments.

Paving the way for the restructuring of UTI and eventual exit of the government, the Cabinet approved the ordinance to repeal the UTI Act, on 28th October 2002.

A new scheme, Unit Scheme-200229, (formed by the splitting of US-64) was started on 18th November 2002. The scheme with a corpus of Rs.585 crores, had 50% of its assets in equity and 76 scrips in its portfolio compared to 900 in case of US-64.

Conclusion

On February 1, 2004, at the National Centre for Performing Arts at Nariman Point, Mumbai, almost 1,100 people came to celebrate the first anniversary party of UTI Mutual Fund, which had been born when UTI was bifurcated into two parts, UTI-I and UTI Mutual Fund. UTI-I, as a

25 Khanduri, Manish and Anand, M. “Extent of the rot at UTI,” Business World, 2nd September 2002, pp. 36-38. 26 Initially, the maximum repurchase amount was 3000 units. It was increased to 5000 units on 2 nd January 2002 when it was found that the redemption pressure was not high. 27 In between, the redemption price was to increase by 10 paise every month until May 2003, when it would be Rs. 12 per unit. 28 Later renamed UTI Mutual Fund. 29 The units bought after Jan 2002 and also the units of unit holders who used the dividend reinvestment option after July 2001 were brought under the scheme. 10 special unit with all the guaranteed return schemes, had an outstanding corpus of Rs 19,200 crore and 18 schemes. The problem scheme, US-64 had been laid to rest on May 31, 2003. The investors could either sell their units back to the trust or convert them into 6.75% tax-free bonds. UTI-I, handled all the assured return schemes, including US-64. UTI Mutual Fund, handled UTI's 42 market-linked schemes.

The mess that UTI found itself 32 months ago had been sorted out to a large extent. The stock market rally had helped UTI restructure its bulky portfolios without incurring a loss in the bargain. UTI’s 26 equity schemes had invested in 447 companies in December 2002. In December 2003, they had investments in only 337 companies. Portfolios also looked much healthier. Holdings in non-traded stocks had fallen sharply. UTI's schemes had also outperformed their benchmark indices in the bull run of late 2003 and early 2004. Eighteen of UTI’s equity funds and five debt-oriented schemes had made 38 dividend and four bonus payments worth Rs 1,438.29 crore since 1 February 2003. The funds had made provisions for about Rs 900 crore of non-performing assets (NPAs), so their net NPA position was zero. Assets under management had increased by over Rs 5,000 crore over the past year. UTI had sold some of its holdings, booked profits and distributed dividends by selling out slowly without upsetting the stock markets. 11

Appendix

Exhibit: I Contributors to the initial capital of US-64 Name Contribution (in lakh rupees) Reserve Bank of India 250 ICICI 13 IFCI 21 Scheduled Banks* 70.5 Rest 145.5 Source: Unit Trust of India: Retrospect and Prospect, p-123.

Exhibit: II Five Yearly Compounded Average Growth Rates of Units Period Growth Rate % per year July 1965-June 1970 26 July 1970-June 1975 14 July 1975-June 1980 20 July 1980-June 1985 23 July 1985-June 1990 47 July 1990-June 1995 17 July 1995-June 2000 -.17 Source: Unit Trust of India: Retrospect and Prospect, p-225. 12

Exhibit: III Comparison of NAV-based Unit Prices with Special Sale Prices Adjusted NAV p.u ((SSP- NAV per NAV-based Special Sales +Management ADNAV)/SSP) Date unit price Price (SSP) Expenses *100 (2) (ADNAV) (5) (3) MARGIN (6) (4) 1st July 65 9.93 10.43 10.45 10.15 -2.87 1st July 66 9.82 10.31 10.35 10 -3.38 1st July 67 9.62 10.09 10.1 10 -.99 1st July 68 9.97 10.47 10.5 10.1 -3.81 st July 69 11 11.55 11.55 10.2 -13.2 1st July 70 11.1 11.66 11.7 10.5 -10.26 1st July 71 11.03 11.58 11.6 10.6 -8.62 1st July 72 10.74 11.27 11.3 10.45 -7.52 1st July 73 10.88 11.43 11.45 10.45 -8.73 1st July 74 12.15 12.76 12.8 10.3 -19.53 1st July 75 9.52 10 10 10.25 2.52 1st July 76 10.32 10.84 10.85 10.3 -5.07 1st July 77 10.86 11.4 11.4 10.7 -6.17 1st July 78 11.59 12.17 12.3 11.25 -7.79 1st July 79 12.38 13 13 11.5 -11.54 1st July 80 12.57 13.19 13.2 11.75 -10.98 1st July 81 15 15.75 15.75 11.5 -26.99 1st July 82 13.79 14.48 14.5 12 -17.24 1st July 83 14.84 15.59 15.60 12.25 -21.47 1st July 84 14,81 15.55 15.55 12.6 -18.98 1st July 85 17.99 18.89 18.9 12.75 -32.54 1st July 86 17.76 18.65 18.65 12.85 -31.1 1st July 87 15.9 16.70 16.7 13 -22.14 1st July 88 15.47 16.25 16.25 13.2 -18.75 1st July 89 16.18 16.99 17 13.4 -21.18 1st July 90 14.95 15.70 15.70 13.75 -12.41 1st July 91 16.56 16.56 17.40 15.22 -12.53 1st July 92 28.92 28.92 30.40 13.58 -55.33 1st July 93 19.76 19.76 20.75 14.72 -29.06 1st July 94 23.97 23.97 25.2 15.97 -36.63 1st July 95 16.61 16.61 17.5 15.52 -11.31 1st July 96 15.97 15.97 16.8 13.8 -17.86 1st July 97 13.08 13.08 13.75 14.44 10.39 1st July 98 7.04 7.04 7.5 14.12 88.27 1st July 99 9.1 9.1 10 14.24 42.40 Column (2): Gives NAV per unit. Column (3): Incidental and Management expenses at 5% of NAV. Column (4): Figures in Col 3 are adjusted to upward to nearest 5 paise. Column (5): The Sale Price announced on the 1st of July every year. Column (6): The difference between Special Sale Price and NAV price as a percentage of NAV price.

Source: Unit Trust of India: Retrospect and Prospect, pp. 230-233. 13

Exhibit: IV Composition of investments of US-64 (June 87-June2000) Year Ordinary Preference Term Govt. Debentures Others Total Share Shares Loans Securities June-87 23.20 .4 62 1.8 .12 12.48 100 June-88 26.30 .36 55.64 8.35 1.08 8.24 100 June-89 23.67 .21 32.68 6.78 16.80 19.88 100 June-90 25.83 .13 26.53 8.39 16.33 22.79 100 June-91 24.68 .16 30.64 9.19 11.72 23.61 100 June-92 27.38 .20 34.11 10.63 10.48 17.20 100 June-93 33.47 .16 33.47 13.16 .01 19.73 100 June-94 39.46 .12 23 8.12 19.31 9.99 100 June-95 50.57 .13 17.49 6.63 21.91 3.27 100 June-96 66.17 .14 17.82 1.38 13.13 1.36 100 June-97 65.70 .13 19.14 1.44 9.90 3.69 100 June-98 69.64 .22 17.06 3.3 7.77 2.01 100 June-99 68.21 .22 10.28 2.01 19.01 .27 100 June-00 72.62 .3 8.98 1.5 16.26 .34 100 Source: Unit Trust of India: Retrospect and Prospect, p-243.

Exhibit: V Dividend Rates 1964-65 to 2001-02 Year Rate Year Rate Year Rate 1964-65 6.1 1977-78 9 1990-91 19.5 1965-66 7 1978-79 9 1991-92 25 1966-67 7 1979-80 10 1992-93 26 1967-68 7 1980-81 11.5 1993-94 26 1968-69 7.1 1981-82 12.5 1994-95 26 1969-70 7.2 1982-83 13.5 1995-96 20 1970-71 8 1983-84 14 1996-97 20 1971-72 8.25 1984-85 14.25 1997-98 20 1972-73 8.5 1985-86 15.25 1998-99 13.5 1973-74 8.5 1986-87 16 1999-00 13.75 1974-75 8.6 1987-88 16.5 2000-01 10 1975-76 8.75 1988-89 18 2001-02 Nil 1976-77 9 1989-90 18 Source: Unit Trust of India: Retrospect and Prospect, p-245. 14

Exhibit: VI Distribution of Income of US-64 (Rs.Crore) Allocation to Year Net income Distribution Percent Percent reserves 1986-87 235.32 225.06 95.6 10.26 4.4 1987-88 402.13 366.65 91.2 34.54 8.8 1988-89 945.88 805.34 85.1 140.65 14.9 1989-90 1304.27 1264.45 96.9 40.69 3.1 1990-91 1643.55 1416.41 86.2 227.59 13.8 1991-92 2400.68 1581.48 65.9 812.61 33.8 1992-93 2689.7 1925.35 71.6 763.3 28.4 1993-94 3536.41 3123.8 88.3 454.6 12.9 1994-95 3286.34 3971.95 120.9 -696.7 -21.2 1995-96 1595.44 2701.89 169.4 -1146.95 -71.9 1996-97 2414.12 2804.63 116.2 -386.26 -16 1997-98 3222 3125 97 Nil 0 1998-99 2265.18 1827.79 80.7 402.06 17.7 1999-00 2734.75 2081.92 76.1 655.99 24 Source: Unit Trust of India: Retrospect and Prospect, p-249.

Exhibit: VII UTI’s Holding in the K10 scripts Company Value (Feb 2001) Value (Dec 2000) Value (June 2000) Aftek Infosys 2.86 7.8 20.72 DSQ Software 13.139 21.68 49.50 Global Tele 54.02 185.13 584.16 HFCL 227.155 456.08 1311.64 Ranabxy Labs 221.44 147.78 257.24 SSI 61.33 62.57 551.49 Silverline .4 1.54 6.17 Satyam Computers 455.64 425.86 1304.88 Pentamedia Graphics 15.33 Nil 183.22 Zee Telefilms 122.82 180.92 412.79 Source: “The Rot in UTI,” Business Today, 6th May 2001. 15

Exhibit: VIII Repurchase Price of US-64 Period Repurchase Price Aug-2001 10 Sep-2001 10.1 Oct-2001 10.2 Nov-2001 10.3 Dec-2001 10.4 Jan-2002 10.5 Feb-2002 10.6 Mar-2002 10.7 April-2002 10.8 May-2002 10.9 June-2002 Book Closure July-2002 11 Aug-2002 11.1 Sep-2002 11.2 Oct-2002 11.3 Nov-2002 11.4 Dec-2002 11.5 Jan-2003 11.6 Feb-2003 11.7 Mar-2003 11.8 Apr-2003 11.9 May-2003 12 Source: www.utiindia.com

Figure (i)

US-64: A Changing Asset Profile- 1990

Others 32% Debt 42%

Equity 26%

Source: www.indiainfoline.com

16

Figure (ii)

US-64: A Changing Asset Profile-1994

Others 23% Debt 37%

Equity 40%

Source: www.indiainfoline.com

Figure (iii)

US-64: A Changing Asset Profile-1998 Others 8% Debt 29%

Equity 63%

Source: www.indiainfoline.com 17

Figure (iv)

US-64: A Changing Asset Profile-2002

Debt 38%

Equity 62%

Source: www.indiainfoline.com

Figure (v)

Source: “UTI: Missed Chances and Inexplicable Decisions,” Business World, August 2001. 18

Annexure 1

What are Unit Trusts?

The economic progress of any country depends not only on the volume of savings generated but also on the manner in which they can be made available to productive and distributive sectors of the economy. This can be done in one or more of the following five ways30:

1) Acquiring various types of real estate and using them for production and distribution of goods and services.

2) Acquiring a share in another person’s business

3) Lending his/her savings to a person engaged in the production and/or distribution of goods and services

4) Purchasing marketable securities like shares, debentures and bonds

5) Finally making the savings available to certain types of institutions called financial intermediaries.

A financial intermediary collects the savings of other individuals and invests them. Banks and insurance companies are the most common types of Financial intermediaries, but they offer only a limited and specialized variety of financial assets. This meant to enable the small investors to acquire assets that are marketable and can give a good yield, a special type of financial intermediary was required. This need was perceived during the second industrial revolution towards the end of the nineteenth century in Europe as a result of the emergence of a new class of investors comprising of rich landowners who had savings but no knowledge of investment business. Investment Trusts emerged to mobilize their savings and make them available to the growing industry. These were management companies, which obtained a fixed amount of capital by issuing ordinary and preference shares. They could also raise loan capital by issuing debentures. The money so raised was invested in other shares, bonds and debentures. The problem of these shares was that of low liquidity31.

This problem of low liquidity was overcome by the setting up of Unit Trusts in the United Kingdom. The unit trusts first invested there own money in a portfolio of securities and then floated the units, which were offered for sale to the public. As per the introduction to US-64,

“ A Unit Trust is a financial institution which pools savings of the community and invests them in various types of securities in a manner which offers to the individual saver, advantages of a reasonable return on his savings and expert management of the portfolio of investment”32.

30 Pendharkar, Vishwanath. “Unit Trusts and Mutual Funds, chapter 2, UTI: Prospect and Retrospect,” UBSPD, 2002. 31 Pendharkar, Vishwanath. “Unit Trusts and Mutual Funds, chapter 2, UTI: Prospect and Retrospect,” UBSPD, 2002. 32 Introduction, Unit Trust of India-Unit Scheme, 1964. 19

Mutual Funds are similar to unit trusts. The difference lies in the fact that mutual funds float shares to the investors and not units. These shares can be sold and bought at a stock exchange. Most of the so called Indian Mutual funds are basically like Unit Trusts of United Kingdom.

Annexure 2

The method of calculating the Repurchase and Sale price as laid down in Clauses 8(2) and (3) of Unit Scheme 64.

The steps laid down were as follows:

1. The prices were to be based on the value of the total assets (and not just securities held) less the current liabilities of the trust.

2. They were to be calculated taking into account the closing prices of the securities for the day immediately preceding the working day.

3. For the purposes of calculation the value of the total assets was to be divided by the number of units deemed to be in issue on that day.

4. And to this the Trust had to adjust the an appropriate amount to allow for charges such as brokerage, commission, stamp duties etc, incidental to the purchase of securities for the Trust’s portfolio.

5. All these calculations were to be made based on the material that was available with the Trust at the time they were made.

6. The final result, the NAV, was to be adjusted upwards for sale prices and downwards for repurchase prices by a maximum of 5 paise per unit.

Finally, under Clause 9 an obligation was placed on the Trust to publish these prices in a suitable manner as early as possible after the close of business each working day.

Concepts of Units Deemed to be in issue: This concept is defined in Clause 2(d) of the scheme. It was to be the sum of a) units sold and outstanding b) the initial capital divided the sale price of units initially i.e. Rs.10. 20

Annexure 3

“As a matter if deliberate policy, the Trust has fixed the actual sale prices of units well below the formula price having regard to the need for making units attractive among the investing public. For the same reason the unit prices have not been allowed to fluctuate in accordance with the fluctuations of securities, though these are varied over the accounting year”

(An excerpt from Unit Trust of India, Review of a Decade of Operations, 1964-65,1973-74, p-3). 21

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