The Securities and Exchange Board of India has recommended that the government amend the UTI Act to convert
US-64 into a savings scheme, on the lines of other schemes offered by government-owned institutions which can be guaranteed by the government.
Officials said this would help quell nervousness in the market and give it some much-needed stability.
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Sebi chairman D R Mehta declined to comment on the issue. However, he admitted that Sebi was unlikely to regulate US-64.
Mehta pointed out that US-64 could not be classified as a conventional mutual fund due to the hybrid nature of its holdings. UTI claims that US-64 has invested in not only debt and equity but also other avenues like real estate.
"The scheme is more like a savings scheme. It is like depositing money in the post-office. The return on investment offered is what matters to the investor. This is done by the government guarantee.
The modus operandi of calculating the return is not questioned. US-64 is certainly not a mutual fund. Therefore, it cannot be brought under the purview of Sebi mutual fund regulations," Mehta told Business Standard.
He added that the scheme had consistently given good returns to investors. "Investors have a lot of faith in the scheme. It has been in the market for 35 years. The market may not be able to survive if the scheme collapses," said Mehta. He also felt that the government should issue a notification to this effect stating the exact nature of the scheme.
Analysts said Sebi may not have any role to play in future with respect to UTI's pre-1994 schemes. They said the government is expected to back returns on schemes not regulated by Sebi.
The government is working out a package of measures which will effectively guarantee the dividend payout on US-64 in 1999. This would help UTI maintain a 20 per cent dividend next year.
Analysts say a guarantee is necessary only till the market recovers. They believe that
US-64's fortunes will revive once the market rallies.
One of the options being considered by the government to restore confidence among investors and help UTI is to advance a soft loan to the Trust for seven years. Finance ministry sources indicate that the loan will take the form of a bond issue with a coupon of 11.5 per cent.
The government bonds will be redeemed by UTI after seven years. Government sources say the seven year time-frame of the bonds, at a reasonable cost, will help revive UTI's financial health.
The loan will help UTI bridge the gap between the income earned by US-64 through interest and dividends and the Rs 3,000 crore-plus dividend payout. Last year, one-third of its total dividend payout of Rs 3,200 crore was earned through dividend and interest income while the remaining two-thirds was earned through profit-booking on shares.