UTI has been at the centre of controversy for quite some time. Though it is almost a mutual fund, it escaped regulatory framework on a specious ground that it was constituted by a special act of parliament, and also unlike other mutual funds, it has investment in real estate and cannot subject itself to the Securities & Exchange Board of India's (Sebi's) jurisdiction. Hence, it never disclosed its net asset value (NAV). The Vagul committee highlighted UTI's claim as adevelopmental financial institution in addition to being a mutual fund. One of the charges levied against UTI was that it lacked transparency in its dealings--the classic instance being the private-placement deal with Reliance Industries running into crores. In spite of being a large player, its market-intelligence apparatus was not up to expected standard. This was revealed in its sale of Brooke Bond Lipton's shares to Hindustan Lever on the eve of its merger being announced. Throughout these controversies, it received the centre's support. UTI declared its dividend in early May. Thereafter, there has been a sharp drop in share prices. It had to make substantial provision for fall in the market value of its investors. This led to an erosion in its NAV as on June 30, 1998.

Investors have not taken kindly to UTI's disclosure and the confidence of the unit-holder is considerably shaken. Further, the matter was compounded by statements issued by UTI's executives like UTI will sell shares of selected blue-chipcompanies, which only caused confusion and panic in the market. UTI's credibility reached its nadir and it was clear that it had faltered.

Various remedial measures are debated at the highest level in government and financial circles. The approach to overcome the problem should be positive and not fault-finding. The basic attitude should be UTI has failed, UTI must succeed'. The centre and the Reserve Bank must take suitable and quick steps to stem the rot and restore confidence. It is abundantly clear that UTI needs restructuring and immediate steps should be taken to define its precise role. It has become too unwieldy and needs to be trimmed. The remedial measures should not be at the cost of other financial institutions like LIC, GIC, or IDBI.

The suggestion that the government should give tax concessions to UTI on its dividend up to a particular limit to the unit-holder is not proper, as UTI is like other mutual funds and such benefits will have to be extended to other mutual funds also. Besides, UTIdoes not pay tax on its income. Therefore, there is no question of the profit being taxed twice, once in the hands of UTI and again in the hands of unit holder. With global recession looming large, one cannot expect any sharp improvement in share prices in the near future. It is arguable whether Unit Trust will have substantial positive net worth after making prudent provisions for depreciation in its investments the next year. It will be worthwhile to consider reintroducing Sec 80M 14 of the Income Tax Act. So long as the dividend declared by the company is equal or more than the dividend earned from any UTI scheme, dividend earned and declared should be tax-free. It will enable corporate bodies to park their surplus funds as it will increase the yield on investment.

The government must bail out UTI from its predicament. In the US, the Federal Reserve along with leading banks and financial institutions came to the rescue of a leading hedge fund LTCM by providing funds and guarantees running into billionsof dollars. Indeed, in the Indian context, UTI is "too big to tail".

One of the suggestions made is that large corporate bodies like Bajaj Auto, Hindalco, or Bombay Dyeing, which have parked funds with UTI, should continue to do so as a measure of support to the trust. It must be realised that directors of these companies owe it to the shareholders. Directors must take any commercial decision on merit to safeguard the interest of the shareholders. Some of these companies have already put in an application to UTI for encashment of units, but are not insisting on it. This is merely to safeguard their interests if in future the repurchase price is less than the price prevailing on the date of application. If the government decides to a give line of credit to UTI, part of it may be utilised for repayment to corporate bodies in response to their applications for encashment. It must be realised that an opportunity for safe investment giving reasonable return and adequate security are limited, and once it is clearthat the government stands with UTI, corporate bodies will continue to park their funds.

Some of the leading business houses desire to increase their holdings in companies managed by them to avoid possible takeover in future. UTI may approach such companies. However, it will depend upon the average cost of the scrip in its portfolio. If it is higher than the market price of the scrip, it is logical that promoters who are inclined to increase their holdings would prefer to buy from the market than from UTI. Further, it will also depend upon the perception of the promoter in respect of immediate prospects of the industry and market trend of the price of the scrip. On the other hand, if the average cost of the scrip to UTI is at least 20 per cent lower than the prevailing market price, UTI may consider making an offer to the promoter, and if the quantity offered is significant, UTI may be able to get a higher price, nearer to book value of the scrip than the prevailing market price. It will depend upon thecomparative negotiating strength of UTI, its need for funds and the promoter's desire to acquire the scrip while considering restructuring at UTI and confining its role as a mutual fund. The authorities may consider divesting UTI's investment in real estate, or other investments which generally do not fall within the ambit of a mutual fund. Of course, UTI at any point of time should not resort to distress selling.

Small investors look to concrete steps being taken by the government to remove lacunae, UTI's shortcomings and make it adhere to discipline, which other mutual funds are following. In the meantime, one wonders whether like all corporate bodies, UTI will disclose at least its six-monthly results, that is, as on December 31, 1998, soon thereafter.