The government's thoughts on UTI's future could include privatisation, or a strategic partner. But, first, chairman M. Damodaran has to clean up the Trust's innards and he has a year to do it.

By Roshni Jayakar

It was on day 83 of Meleveetil Damodaran's reign as the chairman of the Unit Trust of India that Finance Minister Yashwant Sinha indicated that the privatisation of UTI was being considered at North Block, the seat of the finance ministry. Two days later, on Day 85, the financial press reported that UTI's corporate restructuring committee, headed by Y.H. Malegam had recommended that the Trust rope in a strategic partner.

M. Damodaran, Chairman, UTI: rebuilding trust

Days are of great relevance to Damodaran who will have all of 274 of them left by the time you read this (October 15, 2001; he took over as chairman of UTI, on a one-year term, on July 15, 2001, a Sunday) to turn around the Trust. As one would expect of anyone in his position, his energies are directed to the immediate task of remaking UTI. But he does have his views. ''I don't buy the argument that privatisation will improve the efficiency and profitability of the fund; the two are ownership neutral,'' says the 54-year-old career bureaucrat. Nor is he willing to buy the argument that privatising the asset management part of UTI will make things better for investors. And to back this he rattles off the names of some of UTI's schemes that have fared well: UTI Petro Fund, UTI Pharma Fund, Mastershare... (For a snapshot of how UTI's schemes have fared against the competition's in the last three months as well as the past year, see How UTI's Funds Fared).

Damodaran hadn't received a signed copy of the Malegam Committee report when he met with this correspondent (Day 85), but he doesn't think fund management is a problem for an entity that manages 92 schemes and has a corpus of Rs 53,000 crore. ''Give the organisation a little more time to improve its decision making systems,'' he responds. If no one is willing to give UTI, or Damodaran that, it isn't surprising given the Trust's recent track record.

UTI's portfolio of investments is far from healthy, the stockmarkets have gone down south, the CBI is still investigating some of its investment-decisions, and the woes of the US 64 scheme are far from over (See What's Happening With US 64). But Damodaran's CV, UTI-insiders claim, has what it takes to tide over the crises. A sampling: his last assignment before UTI was with RBI, restructuring three banks that were in a mess, UCO Bank, UBI, and Indian Bank; and a decade ago, when insurgency was a way of life in the north-eastern state of Tripura, it was Damodaran, then Chief Secretary of the state who saw things through. But bringing UTI out of the mess it has gotten itself into will require all of the man's political, financial, and managerial skills. ''It's basically a question of restructuring the organisation, boosting morale, enabling people to perform, and distinguishing between performers and non-performers,'' says Damodaran. Only, it isn't so basic.

Problem # 1: Questionable Investments

The presence of several poor and questionable stocks in the portfolio of US 64 and in those of other schemes has eroded the value of the fund's investments. It won't be easy to reshuffle a portfolio of over 1,100 scrips (which is what US 64 boasts). UTI is already working on the process of identifying stocks that do not add value to the portfolio and weeding them out. In the meantime, it has approached some of the promoters to find out whether they are interested in buying back the stock of their companies. UTI's books put the value of each of these holdings uniformly at Rs 100,000 (that's how bad they are). Damodaran claims he can get a better price from the promoters. But that's highly debatable. ''Some of these holdings are of such poor quality that the promoters may not have funds to buy them,'' says an investment banker.

The Trust may be more successful at finding other institutional buyers for some of its holdings. For instance, in September it sold stocks worth Rs 220 crore to LIC. UTI was over-exposed to most of these stocks, but couldn't sell them in a depressed market in the absence of volumes. And, displaying the kind of fund-management logic it hasn't for some time, the institution bought stocks when the markets crashed after September 11. ''The markets can't get any worse and value-buying will give us returns over time,'' says Damodaran denying that the buying was in anyway influenced by the government.

And in an effort to quell that constant gripe about UTI's research not being good enough, plans are afoot to rate the more than the 200 empanelled brokers on the institution's roster in terms of the quality of their research. This, the reasoning goes, will supplement UTI's in-house research which Damodaran concedes, ''may not be quick enough for secondary market investments''. The Trust is still far from implementing the Deepak Parekh Committee's recommendation of a debt: equity split of 70:30 in the US 64 portfolio. The ratio stands at 34: 66 and the thinking in the Trust is that 50:50 is an adequate split.

As part of the makeover of US 64, its real estate holdings, valued at Rs 850 crore in June 2001, have been moved to the Development Reserve Fund set up for the development, research, and promotional activities of the trust to provide gaurantee in terms of return or capital under some schemes and an equivalent amount of cash has been infused into the fund.

Has enough been done? Says a Mumbai-based banker who refuses to be quoted: ''Considering the size and quality of the equity portfolio, it would be tough for Damodaran to entirely revamp it in a short time.'' The belief underlying UTI's investment makeover strategy is that somewhere down the road, around 2003, the markets will move up leading to an appreciation in the value of its investments.

That is also when the special repurchase scheme for US 64 units will end-for those who came in late, following an announcement regarding a freeze on sale and repurchase of US 74 units, and the consequent panic, UTI launched a limited repurchase scheme where it would redeem upto 3,000 units per investor at rates starting at Rs 10 (in August 2001), and increasing by 10 paise every month to Rs 12 (in May 2003).

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