US-64: A survivor’s guide

A lifeline just about keeps investors afloat

Deepak Parekh Committee Recommendations

Aim of the Deepak Parekh committee:

• To review the objectives, features and structure of US-64 scheme in the context of its role in the mobilisation of domestic savings and investment in the capital market.
  
• To review the policies of US-64 scheme relating to pricing and income distribution, having regard to the profile of existing investors of the scheme.
  
• To review the policies and procedures about the portfolio composition of the scheme as well as the asset management process.

1. As a one-time measure, contributors to the initial capital of the US-64 scheme, which includes IDBI, LIC, SBI and its subsidiaries, other institutions and scheduled banks, infuse at least Rs 500 cr at the ruling sale price immediately into the corpus of the scheme. This will be in keeping with both domestic and international practice where the sponsoring institutions stand by their fiduciary obligations................ Implemented. 
2. PSU portfolio should be transferred at book value to a Special Unit Scheme (SUS-99) created for this purpose. The Government of India would subscribe to SUS 99 by issue of dated government securities. SUS-99 would discharge the transfer consideration to US-64 by transferring these dated government securities to US-64. As an alternative to the government directly subscribing to units of SUS 99, it could guarantee the bonds to be issued by SUS-99 to discharge the transfer consideration to US-64. Thus Government will be able to provide support without any immediate impact on its budget................ Implemented.  
3. US-64 to make a strategic sale of its significant equity holdings by negotiation to the highest bidder to ensure fetching the best value for the unit holder. It is important that to achieve this objective, UTI be accorded full autonomy to negotiate and effect sale of shares................ Implemented.
4. In the interest of the early revival of the mutual fund industry, the benefit of tax rebate under Section 88 may be extended to retail investment in mutual funds without any sub-limit, as at present. The investment ceiling under Section 88 are increased from Rs 60,000 to Rs 70,000, and this increase of Rs 10,000 should be available only for investments made under section 88 (2) (xiiib), provided that such investments are locked in for a minimum period of three years. As a special dispensation, investments in US-64 should qualify for tax rebate under the suggested provision even if its equity investments constitute less than 50% of its long-term investments for the next three years while the scheme is being restructured................ Implemented
5. As a special dispensation, dividends from US-64 are rendered tax-free in the hands of the investors even if the equity investments constitute less than 50% of total long-term investments in the next three years while the scheme is being restructured................ Implemented.
6. The commercial banks have had two years of strong deposit growth. However, inspite of the RBI initiative in encouraging banks to invest up to 5% of their incremental deposits in equity shares, not much progress has been achieved by the banks. In order to help revive the capital market, the Committee recommended that commercial banks be encouraged to contribute Rs 1,000 crore to Rs 1,500 crore towards the corpus of a new equity related scheme to be promoted by the UTI................ Implemented.
7. The UTI Act needs to be amended to increase the size of the Board of Trustees, so as to induct five additional independent Trustees................ Implemented.
8. The UTI Act may be amended to facilitate the setting up of an Asset Management Company. Pending the amendment, the present Asset Management Committee should be reconstituted and its role and responsibilities clearly defined................ Implemented.
9. UTI may appoint separate and independent teams of fund managers for each scheme. Inter-scheme transfers, if any, should be effected on the basis of independent decisions and requirements of the fund managers of the concerned schemes, and at market determined prices. These fund managers should have the final authority and responsibility in the decision-making process................ Implemented.
10. US-64 would have to become a NAV driven scheme The Committee considered that a period of about three years should suffice to bring the NAV of the units in line with their repurchase price................ Implemented.
11. Dividend distribution policy of UTI is to be thoroughly revamped to ensure that the scheme is responsive to the changing market conditions................ Implemented.
12. The Committee noted with concern that, despite the adverse past experience, the UTI continues to promote 'assured return' schemes, and that too for the benefit of institutional investors. The Committee was also of the view that the concept of assured returns, in an era of volatile interest rates, should be done away with in respect of all mutual fund schemes in the country................ Implemented.
13. The Committee observed that there would have to be a major asset reallocation of the portfolio composition of US-64 to provide for more weightage to debt consistent with the objectives of the scheme. This needs to happen without US-64 having to resort to selling large parts of its equity portfolio in the market, as this would severely hurt the market sentiment and add to the present difficulties................ Implemented.
14. The operations of the US-64 are brought within the purview of the SEBI at the earliest. Necessary amendments to the UTI Act should be made................ Implemented.
15. UTI should commission a detailed review of the asset management processes including the back office processes, inter-scheme transfers, and of the investor servicing processes by an independent professional firm................ Implemented.
16. To sum up, the Committee observed that with over two cr unit holders, public confidence in the US-64 is a virtual proxy of public confidence in the Indian financial system. The Committee was of the opinion that the recommendation in their report when viewed in the perspective, would justify the envisaged financial support from the Government................ Implemented.
17. Increasing the size of the UTI board by inducting additional five members................ Not implemented.
18. Setting up of a separate asset management company for US-64 with an independent board of direct................ Not implemented.
19. Make US-64 NAV-driven in three years................ Not implemented.

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