The Unit Trust of India's (UTI) US 64 scheme has emerged relatively unscathed from the crisis that had gripped it last year. The corpus of the scheme has dwindled by only Rs 16 bn (The corpus of US 64 scheme exceeds Rs 200 bn) while it has lost some 1.5 m of its 22 m investors. Most of the redemptions have been due to the pulling out of the institutional unit holders from the scheme.

The US 64 scheme of the UTI was gripped in a very serious crisis in the previous year. In the past couple of years the scheme had been paying dividends from its reserves rather than from profits. This resulted in a negative reserve balance. Moreover, to portray an image that the scheme was performing well, the Trust had been buying and selling units of US 64 scheme at a large premium to the net asset value (NAV). This situation was precipitated by some poor investments and by the continued weakness in the market since the latter half of 1994. As concerns about the viability of the scheme increased a large number of people were tempted to redeem their units to avoid the capital loss that might occur if the trading price of the scheme were to be revised downwards to more closely represent the NAV of the scheme. Subsequently, however, the government stepped in and bailed out the scheme. Also, the Deepak Parekh Committee was set up to look into he working of the fund and suggest measures for the redressal of the current problems.

During FY99, the US64 scheme was able to raise fresh funds to the tune of Rs 46 bn while the fund outflow on account of repurchases stood at Rs 62 bn. This led to a shrinking of the corpus by Rs 16 bn. For the financial year ended June 30th 1999, the fund is expected to lower the dividend and the sale price of its units. The US 64 scheme currently has 64% of its corpus invested in equities while the rest is invested in government securities, corporate debt instruments, and real estate properties.

In a related development, the bailout package for the US 64 is likely to cost the government Rs 33 bn against the Rs 48 bn originally envisaged. The plan involves setting up a scheme "Special Unit Scheme" to which the government will subscribe through the issue of special debt securities, maturing in 2004. The debt securities, which will be non-transferable, can be used as collateral by UTI to raise funds. The UTI in turn will transfer select securities from the US 64 to the new scheme. This measure will provide the much-needed liquidity to the US 64 scheme while avoiding any sales in the market.

Though UTI seems to have emerged relatively unscathed from the crisis, it needs to become more transparent in its operations if it were to again attain high rates of growth that it had enjoyed prior to the crisis. The implementation of the recommendations of the Deepak Parekh committee recommendations could be the first step in this direction.

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