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From Golden Days to Tragic End

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From Golden Days to Tragic End
From Golden Days to Tragic End
Yagnesh Kansara - 15 May 2019

The country’s first ever mutual fund, the Unit Trust of India (UTI) was launched by the Reserve Bank of India (RBI) in 1963 under a special act Unit Trust Act, 1963 enacted by the Parliament.

The units issued by it in 1964 were named US-64, which gave attractive returns and became popular among all classes of investors. Since its inception, US-64 distributed dividends on a regular basis, and thus acquired an enviable reputation. Individual investors and corporates caught on to the bonanza pretty quickly, and the funds collected by the scheme spurted. While the dividend rate rose from 18 per cent in 1990 to 26 per cent in 1995, unit capital more than doubled from a little over Rs7,000 crore to over Rs15,000 crore.

“Those were the Golden Days for investors as returns from US-64 often exceeded yield provided by bank fixed deposits” said K H Hemant, a US-64 investor, who began cultivating his saving habit with the launch of country’s first MF scheme. A gemologist by profession, Hemant said, “The scheme was equally popular among all the  classes of investors”.

In the early 1990s, the UTI decided to distribute the reserves built-up over the years to its unit holders in the form of higher dividends, preferential offers, rights and bonus shares.

In it’s hey days, even after the mutual fund sector was opened up to private players in 1994, the UTI commanded a market share of 78 per cent till 1998–99. 

Around this time, few decisions were taken by the UTI top brass that became the genesis of the problems faced by the scheme. The management decided to increase the equity exposure of the scheme to around 70 per cent of the holdings, and yet the US-64 continued to play the role of a regular income scheme to unit-holders.

However, at the fag end of its tenure, US-64 suffered double whammy; it got trapped into more than one controversy and also suffered from market turbulence.

The central government had to stitch out a bailout package and UTI’s working was restructured. It was bifurcated into two parts—the assured return schemes including its flagship US-64 and its other investment in the market infrastructure institutions (MIIs) like IL&FS, Discount and Finance House of India (DFHI), Stock Holding Corporation of India Ltd (SHCIL) and others, and US- 64’s sizeable and strategic stake in UTI Bank (now Axis Bank), ITC and L&T were bundled together.

Since these holdings were in the form of strategic investment, government decided to retain with UTI, renamed Specified Undertaking of the Unit Trust of India (SUUTI). All the other non-assured schemes floated by erstwhile UTI and which were governed under rules and regulations of the capital market regulator Securities and Exchange Board of India (SEBI), were housed under UTI Mutual Fund (UTI MF).

The administrator of SUUTI decided to foreclose the US-64 scheme as on May 31, 2003 and issued cheques to the investors. The investors were given a repurchase option or get the units converted into the 6.75 per cent Tax-free US 64 Bonds. These bonds were to be matured in five-year period i.e. in 2008 and interest was paid on it, every six months, twice in a year. With these bonds maturing on June 1, 2008, 10 years ago, curtains were rolled down on the US-64.

The Indian mutual funds sector has grown in leaps and bounds since then. It has now about 45 Asset Management Companies managing around Rs23.40 lakh crore of Assets under Management at the end of June (FY’18) and is expected to go higher. The life continues. 

yagnesh@outlookindia.com

 

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