Current Economic Statistics and Review For the Week 
Ended April 9, 2005 (15^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

CORPORATE SECTOR

New ventures
Aditya Birla Group’s flagship company Hindalco Industries has signed a memorandum of understanding with the Orissa government to set up an aluminium complex at a cost of Rs 11,000 crore. 

The Neelachal Ispat Nigam Ltd (NINL), a joint venture of MMTC and Orissa government, has chalked out a Rs 1,000 crore investment plan for production of long products.

The South Korean steel major has proposed to set up a 12 million tonne steel plant in Orissa at an estimated investment of $ 10 billion. The company has sought 1 billion tonne of iron ore reserves for the purpose. The state government has clarified that it would provide the company only the quantity required by the installed capacity of the project. 

Engineering and construction major Larsen & Toubro has entered into an understanding with Dubai Aluminium Company Limited (Dubal) to set up an integrated bauxite mining-cum-alumina refinery project for Rs 5,000 crore in Orissa.

Larsen & Toubro Ltd (L&T) and its consortium partner, the US-based Global Industries Offshore, have obtained a Rs 1,864 crore order from Oil & Natural Gas Corporation (ONGC) to replace pipelines and modify platforms at Bombay High, off western offshore. 

The government has approved Reliance Industries Ltd’s $ 2.49 billion plan to develop its gas field in the Krishna-Godavari basin in the Bay of Bengal. 

Reliance Energy Ltd (REL) has obtained the 280 MW Urthing Sobla hydro power project in Uttaranchal. This will be the first hydro power project to be developed by REL.

BSNL has announced an investment of Rs 75,000 crore over three years for expansion of its services, including the broadband and mobile sector. 

Nokia has signed a memorandum of understanding (MoU) with the Tamil Nadu government for investing $ 150 million in a mobile phone manufacturing facility near Chennai. This will be Nokia’s first facility in India and its tenth globally. 

Bharti Tele-Ventures has drawn a capital expenditure plan of $ 850-900 million for 2005-06. The company expects to use about two-thirds of the plan expenditure on business related to mobile services and the remaining on broadband, fixed line and related activities. 

Dabur Foods plans to begin export of its coolers range of beverage to Australia and Middle-East in the next six months. The company also aims to double its exports of bulk fruit pulp and branded products to Rs 12 crore in 2005-06. 

Pepsico International and Unilever are extending their ‘Pepsi Lipton’ alliance to India. As part of the alliance, both the companies plan to introduce more ready-to-drink products under the Lipton brand. The Pepsi-Lipton alliance in India is being built upon its success in the US and other select global markets. 

Maruti Udyog Ltd, the country’s largest passenger vehicle manufacturer has announced investments worth Rs 3,272 crore for setting up an assembly line for cars and an engine and transmission plant at Manesar in Haryana. The Maruti board has approved Maruti Suzuki Automobiles India Ltd as the name for the new car manufacturing company. Maruti will hold 70 per cent equity in this company and Suzuki Motor Corporation 30 per cent. 

The Taj group has kickstarted its Rs 50 crore phase II makeover of its business hotels. These include Taj Connemara in Chennai; Taj Residency, Bangalore; Taj President, Mumbai; Taj Blue Diamond, Pune; and Taj Chandigarh. The phase II makeover plan will include refurbishing or launching of bars and restaurants in the business hotels. 

Consumer electronics major Samsung India will invest $ 12.5 million in 2005 to increase its R&D operations in the country. 

Mphasis BFL has informed the Bombay Stock Exchange (BSE) that it has commenced operations at its business process outsourcing (BPO) facility in Mangalore. With an initial investment of Rs 70 crore, the Mphasis Mangalore facility is to provide contact centre services for several Fortune 500 companies.

Essar Global, the overseas investment arm of the Essar group, has signed a memorandum of understanding with Qatar Steel Company (Qasco) to build a 4 million tonne steel plant. The plant will be set up at Mesaieed Industrial City in Qatar at an estimated cost of $ 1.25 billion (approximately Rs 5,500 crore). 

Rites, the Indian Railways subsidiary, has obtained five contracts worth Rs 180 crore for rehabilitating Angola Railways. 

Mergers & Acquisitions
The Canada-based Precix Advanced Cutting Technologies and Lipi Marketing Pvt Ltd have entered into a 50:50 joint venture to manufacture ‘robotic router tables’ for the Indian and ASEAN markets and will invest Rs 2 crore to set up a manufacturing facility in Chennai. 

Cognizant Technology Solutions has entered into a formal partnership with Inforte Corp, a business and customer intelligence consultancy, to deliver a comprehensive customer relationship management package to global customers. 

ICICI OneSource Ltd has completed the acquisition of RevIT Systems, a Chennai-based healthcare outsourcer. Rev IT provides outsourcing services in the healthcare domain. 

Royal Classic Group, the Rs 220 crore Coimbatore-based textile company, has acquired ‘Smash’ brand from a Mumbai-based textile firm Abbee company. ‘Smash’ in its earlier avatar during 90s was known for its range of t-shirts.

eFunds, a global supplier of electronic payment solutions has acquired the entire business of India Switch Company for $ 20 million. It has thus forayed into the growing domestic ATM solutions market.

United Breweries Ltd has bought out the minority stake of 35 per cent in Associated Breweries and Distilleries Ltd (ABDL). 

The Vadodara-based speciality drug manufacturer Sun Pharmaceutical Industries Ltd has decided to merge the pharmaceutical business of MJ pharmaceuticals Ltd based at Halol near Vadodara, into itself.

Hexaware Technologies has approved an increase in the limit of foreign institutional investment in the company from the current 74 per cent to 100 per cent at its annual general meeting. 

The CK Birla group is selling the heavy engineering division of Hyderabad Industries Ltd (HIL) to JP Chowdry controlled Titagarh Wagons Ltd (TWL). The HIL board approved the transfer of heavy industries division to TWL.

Morgan Securities & Credits has acquired 12.88 per cent stake in Gouri Prasad Goenka-promoted Star Paper Mills. 

Vaishnavi Corporate Communications has announced its strategic alliance with London-based Financial Dynamics in areas of communications, consulting, investor relations and public affairs. 

Godrej Global Solutions, the wholly owned subsidiary of Godrej Industries, has acquired US-based Outsource Offshore Inc for an undisclosed sum. 

Jubilant Organosys plans to take its recent acquisition in the US public through an initial public offering (IPO). The company announced that it has signed a pact to pick up a controlling 75 per cent stake in the US-based unlisted generic pharmaceutical company in an all cash $ 8.25 million deal. 

Company results 
State-owned National Thermal Power Corporation has recorded a net profit of Rs 5,292 crore in 2004-05 and announced an investment of Rs 8,550 crore in the current financial year. The company said it had added 2000 Mw in 2004-05. 

The National Aluminium Company (Nalco), the country’s largest producer and exporter of alumina and aluminium, has registered a 63 per cent rise in profit to Rs 1,200 crore in 2004-05 compared with Rs 737.37 crore in the previous year. 

Defence electronics firm, Bharat Electronics Ltd (BEL) has reported Rs 656 crore in profits before taxes (provisional) in 2004-05 with sales at Rs 3,223.6 crore.

The firm H&R Johnson’s turnover has gone up by 21 per cent to Rs 535 crore in 2004-05 from Rs 441 crore in the previous year. 

Bharat Earth Movers Ltd (BEML), the public sector heavy engineering firm has reported a 444 per cent increase in profit before tax at Rs 272.16 crore. 

With commodity prices easing by the end of last year, FMCG major Nestle India has posted a 68.4 per cent rise in net profit to Rs 76.5 crore in the fourth quarter ended December 31, 2004. The steep rise was also due to the fact that the company incurred certain non-recurring exceptional operating expenses in the last quarter of 2003. 

Policy issues
The Cabinet has approved a proposal for allowing Indian Oil Corporation to charter ships for importing oil. 

The Cabinet also has given its approval to a proposal for providing guarantees to Indian financial institutions negotiating with the foreign stakeholders to settle Dabhol Power Company’s overseas debt. 

Nigeria’s National Agency for Food and Drug Administration and Control (NAFDAC) has accused 14 Indian companies of exporting fake and counterfeit drugs to the country. 

The Institute of Chartered Accountants of India’s new Accounting Standard 28 (AS 28) is set to affect the 2004-05 balance sheets and profits of a large number of companies that have not incorporated it in their quarterly numbers so far. AS 28 provides for an asset (barring a few exceptions) as being “impaired” if its carrying amount (its market value after providing for depreciation) exceeds its value in use (present value of the expected cash flow from the use of assets) or net selling value (sale value minus cost of disposal). In such a case, the asset value will have to be reduced to “value in use” or “net selling value”, whichever is higher. In other words, companies will now have to value every asset at the price it can be disposed of. The loss on account o this will be reflected in the profit and loss account of the same financial year. AS-28 is meant to help companies focus on under-performing assets that are carried in their balance sheets and provide investors with an idea of how efficient companies are with respect to the use of capital. 

The government has sought the views of the ministries of external affairs and home on the proposal of Huawei Telecommunications, the Indian arm of Chinese telecom equipment maker Huawei Technologies, to sell its products in India. The company has sought the government’s approval to invest $ 60 million in India to build the infrastructure for expanding its operations and activities in the country. 

After setting tax claims with cigarette major ITC, the revenue department has now initiated talks with the lenders to Daewoo Motors India Ltd for recovering excise arrears amounting to around Rs 1,000 crore. 

Income-Tax authorities have slapped a Rs 261.7 crore demand notice to Wipro pertaining to its software profits for 2001-02, but the IT major said it would file an appeal against it. 

ITC Ltd has informed BSE that it has signed a settlement with the government, agreeing not to claim Rs 350 crore it had paid as deposit in 1996 in relation to an excise case. 

The government has announced a grant of Rs 125 crore to state-run Hindustan Copper for the upgrade and purchase of equipment in a bid to step up copper production in the country.

Company issues
Hindustan Lever has informed the National Stock Exchange (NSE) that it was considering hiving off its tea plantation business in Assam and Tamil Nadu to a separate wholly owned subsidiary. 

Britain’s last major car-maker MG Rover has collapsed, putting 6,000 jobs at risk after it failed to secure an alliance with a potential Chinese partner. Tata Motors had entered into an arrangement with Rover 2002 to export 100,000 cars made on the Indica platform to the British company to be sold under the City rover brand name for five years.

Bajaj Tempo Ltd shareholders have voted in favour of dropping “Bajaj” from the company’s name at an extraordinary general meeting held in Pune.

Sterling Infotech’s non-binding agreement with AFK Sistema to sell 49 per cent in its telecom arm, Aircel, has lapsed on March 31. Sterling executives said the company was not in talks with anyone at the moment though the group was open to selling stakes in Aircel. 

BANKING HIGHLIGHTS

Bank deposits and credit trends
There have been three distinct aspects of scheduled commercial bank operations during 2004-05, contrary to the previous years; they are: (i) a drastic slowdown in deposit growth (ii) considerable moderation of investments in government and other approved securities and (iii) a quantum leap in the non-food credit expansion. 

One of the factors responsible for reduced deposit growth during 2004-05 has been the unwinding of current account balances built up in the previous year. As a result, the accruals under demand deposits have slumped from Rs.58,106 crore in 2003-04 to Rs.8,933 crore in 2004-05. Absolute expansions in time deposits too have come down from Rs.172,417 crore to Rs.153,823 crore following a possible switch of funds from bank deposits to the capital market including mutual funds, due to the revival of share market activities. 

Finally, it is the dramatic rise in non-food credit of scheduled commercial banks that stands out. This is linked to the general revival of investment and growth scenario in the economy. For the first time in recent history of Indian banking, non-food credit expansion at Rs 213,464 crore has been close to the expansion in aggregate deposits at Rs 211,692 crore (both excluding merger effects), thus presenting an incremental non-food credit to deposit ratio of 99.3 per cent. In percentage terms, the expansion in non-food credit has been a phenomenal 26.5 per cent as against 13.4 per cent in the previous year. The outstanding total credit to deposit ratio has risen from 55.9 per cent at the end of March 2004 to 63.5 per cent at the end of March 2005, though there is still a credit potential of about 6 to 7 percentage points. 

INSURANCE

Future Plus, the unit-linked pension plan of the Life Insurance Corporation of India (LIC), has already mopped up over Rs.600 crore and is expected to get Rs.1000 crore within the first month of its launch. No other insurance company has received such an overwhelming response in less than a month of its introduction. The plan was introduced on March 4, 2005. Future Plus is one of the cheapest unit-linked pension plans in the market today. Offering a choice of 4 different funds – bond, income, balance and growth – LIC is charging among the lowest management fee of 1–1.5 per cent plus administration charges of Rs.15 per month. LIC has sold over 1.7 lakh policies till date. This is LIC’s second unit-linked insurance plan (ULIP) after Bima Plus. As there is greater demand for unit-linked plans, which are faring better than the traditional policies, LIC has decided now to shift its product focus and introduce new products on the unit-linked platform. Having launched an investment plan and a pension plan, it is now planning to introduce a unit-linked endowment plan and a unit-linked money-back plan.

TELCOM

Global mobile handset major Nokia has announced that it would set up a manufacturing facility for mobile devices at Chennai in India. The manufacturing unit in Chennai will be Nokia's tenth mobile device production facility globally. Nokia anticipates investing an estimated $100-150 million in the India production plant. The construction work at the site of the manufacturing unit will start in April and production is expected to begin in the first half of 2006. Nokia foresees ramping up the factory gradually and the work force reaching approximately 2,000 employees, when the production is on full scale. In India, Nokia is the market leader in mobile devices. Nokia maintains sales, marketing, customer care, and research and development sites in the country. The company’s decision to invest in a plant came in the wake of the Indian market generating a demand of 23-25 million hand-sets a year.

Telecom major Bharti Tele-Ventures Ltd (BTVL) will invest approximately $900 million (about Rs.4,160 crore) in 2005-06, two-thirds of which will go into the mobile business. The balance would go to other businesses like fixed line, long-distance and broadband.

Increasing competition from private players seems to have dealt a blow to public call office (PCO) business of Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) as over 2,69,000 PCOs of the two-state owned companies have closed down their PCO booths in the last 2 years. 

The state-owed BSNL has announced an investment of Rs.75,000 crore over 3 years for expansion of its services, including the broadband and mobile sector. 

Tata Teleservices (Maharashtra), the last entrant in the mobile service segment, has planned a capital expenditure of Rs.750 crore in 2005-06. The company intends to invest largely on strengthening its network and IT to capture the growing mobile segment in the country. It has already crossed one million customer mark in Maharashtra.

FINANCIAL MARKET DEVELOPMENTS

Capital Markets
Primary Market
Through mutual fund IPOs in March, nearly Rs 7, 000 crore have been mobilized, which includes Rs 1,950 crore raised by Franklin Flexi Cap fund and Rs 1,761 crore by Reliance Opportunities Fund. Industry sources say that almost 90 per cent of the total collection is fresh money and rest is transferred from existing investments. However, the recent spate of IPOs, it seems as per some experts is not driven by the need for specific products but because very little money is flowing in to the existing schemes. 

The IPO of Gokaldas Exports was oversubscribed by 41.63 times on the last day with bids received for 13 crore shares against 31.25 lakh shares on offer. Of the total bids received, FIIs and MFs accounted for 53.72 per cent and 30.93 per cent, respectively. Individual accounts accounted for only 3.12 per cent. Also, the IPO of 3i Infotech was oversubscribed over 6 times. 

Similarly, the IPOs of Allahabad Bank and Shringar Cinemas have been oversubscribed by 3.32 times and 3.84 times, respectively. The bank received bids for 33.2 crore shares against 10 crore shares on offer, while the Shringar Cinemas received 2.4 crore shares against 81.5 lakh offered. Even in case of Shringar Cinemas the bulk of issue is subscribed by the FIIs and MFs as they have subscribed to 78.87 per cent and 21.03 per cent, respectively and individuals account for only a miniscule 0.10 per cent of the total bids. The IPO of Allahabad Bank is to close on April 12,2005. 

As per the data published by Prime Database, there has been a significant rise in mobilization of resources to Rs 3,616 crore in 2004-05 from Rs 1,006 crore in 2003-04, through rights issue. The largest issue in 2004-05 was from Sterlite Industries (Rs 1,972 crore), followed by ING Vysya Bank ( Rs 307 crore) and by United Breweries ( Rs 214 crore). Companies offered shares on rights basis either to expand, diversifyor simply to restructure their balance sheets. Moreover, in some cases, promoters raised their stake in the company at a reasonable price. 

Secondary Market
The stock indices were volatile as the international oil price fluctuated, with the BSE sensex closing on Monday, April 4 at 6604 as against 6605 on Friday, but as oil prices surged it fell to 6550 on the next day. The recovery in global equity markets, decline in international crude oil prices, surge in FII inflows and depreciation of dollar led to a surge in the index on Wednesday, April 6. Ahead of the announcement of fourth quarter corporate results, the market remained cautious. Over the week, BSE sensex declined by 126 points, to close the week at 6479.54 points and NSE nifty closed lower by 36.45 points at 2031. 

For the month of April, till April 8, the net FII investment in equities has been Rs 888.9 crore with purchases at Rs 5,510.9 and sales at Rs 4,622.0 crore.

The FII inflows in the financial year 2004-05 has touched US $ 9.1 billion, marginally lower than $ 9.5 billion in the previous year. Despite the lower flows, FIIs have been the major drivers of the market sentiments. At the end of the third quarter the FII investment remained pegged at around $ 5.3 billion. With the beginning of 2005, the FII inflows have surged and an inflow of near $4 billion have come in the last quarter of the financial year. In 2004-05, 145 new FIIs have been registered with the Sebi thereby bringing the total number of registered FIIs to 685 as on March 31, 2005. 

The Supreme Court has ruled that the powers given to the regulator under section 11 B of the Sebi Act are not only punitive but also preventive in nature. This implies that Sebi can prevent market entities from functioning. The apex court held that restraining an entity not only prevents violator from defrauding investors again but also prevents further potential damage to the market, thus imparting safety. 

Derivatives 
The Trading activity in the derivatives segment was subdued and the average daily turnover was in the range of Rs 7,640 crore to Rs 10,193 crore during the week under review. The foreign institutional investors remained net sellers. 

Government Securities Market
Primary Market
In the first ever auction of 182-day treasury bills since its re-introduction, the yield has been set at 5.44 per cent. The yield on 91-day treasury bill has been set lower from 5.32 per cent to 5.28 per cent in the auction held on April 6. 

On April 5, the RBI auctioned 6.85 per cent 2012 and 7.95 per cent 2032 for notified amounts of Rs 5,000 crore and Rs 3,000 crore, respectively. The cut-off yield has been set at 6.80 per cent for the 7- year paper and 7.79 per cent for the 27-year paper. 

Secondary Market
The volatile global oil prices and higher than expected yield set at the first auction of the current fiscal year, affected the market sentiments adversely pushing the secondary market yields on government securities higher. The weighted average YTM on 7.38 per cent 2015 has risen sharply from 6.67 per cent on March 31 to 6.99 per cent on April 8. Despite the easing of global oil prices, the worries on inflation persisted due to demand from domestic oil refineries for an increase in oil prices. 

The call rates remained easy in narrow range of 4.75 –4.8 per cent despite the central government’s floatation, given the surfeit of liquidity. 

In the collateralized borrowing and lending obligation (CBLO) segment, the lending side is dominated by mutual funds, followed by FIs and insurance companies and by co-operative banks, while the borrowing side is dominated by public sector banks, followed by primary dealers and by private sector banks. 

During the week ended April 8, in the CBLO segment, 966 overnight trades worth Rs 33,686 crore and 44 term trades worth Rs 782 crore were transacted. 

Bond Market
IDBI proposes to launch the first tranche of IDBI Omnibonds (2005-06) issue for an amount of Rs 210 crore. 

Foreign Exchange Market
Despite the dollar appreciating against the yen and the euro touching 5-month and two-month high, respectively, the rupee –dollar exchange rate ruled in a range narrow range of Rs 43.74 to Rs 43.81. 

The six-month annualized forward premia has spurted from 1.52 per cent on March 31 to 1.82 per cent on April 8.

Commodities Futures 
NCDEX (National Commodity and Derivatives Exchange Limited) has entered into a MoU with Food Corporation of India (FCI). Under the terms MoU, FCI will carry out its procurement and sale of food grains from co-operative socities all over the country with the help of NCDEX. NCDEX is to act as a faciltiator to carry out the procurement through its associate company National Collateral Management Services Limited (NCMSL). The tie-up is to establish a working relationship in the areas of procurement, quality testing, grading and open market operations that add value to the business of both the entities. NCMSL which is co-promoted by IFFCO, NCDEX and banks, is engaged in providing warehousing arrangements, quality testing, gradation and assessment for commodities and inventories. 

NCDEX has launched un-decorticated cotton oil seed futures and sesame seeds futures contracts on April 6. The initial contracts available for both of them are for expiry dates in May 2005, June 2005 and July 2005.

PUBLIC FINANCE

Direct tax collections is likely to be around Rs 2,000 crore short of the revised estimates despite a higher residual collection expected by the end of the first week of April 2005. According to sources from finance ministry, income and corporate tax collections figures, till March 31, 2005 were estimated at Rs 1,26,900 crore. The residual figures till the first week of April are expected to be around Rs 3,900 crore. When the residual figure is added to the total direct tax collection till March 31, the total amount is likely to be around Rs 1,31,000 crore. The revised estimate for direct tax collections stands at Rs 1,33,929 crore. The government is expected to exceed its indirect tax collection target for 2004-05 on account of higher collections of customs and excise. According to finance ministry sources, the data till March 31 indicate that the final customs duty collections upto the month end is higher by Rs 1,300 crore over the revised estimates of Rs 56,250 crore for 2004-05.

The mid-term appraisal (MTA) of the Tenth Five year plan has made a case for reducing incidence of indirect taxation, which increases the prices of goods in the country. It has also suggested doing away with tax exemptions. The MTA has further, suggested, reducing peak Customs duty rates from 20 per cent to 10 per cent before 2007. The MTA will be taken up for discussion on April 29.

Income tax exemptions, like those available to charitable or educational institutions may be curtailed in the Direct Tax Laws (Amendment) Bill to be introduced in the second half of the Budget session of Parliament. The Finance ministry is reviewing tax breaks to identify those, being misused or those creating scope for evasion. It is believed that the finance minister has asked tax officials to analyse sops given to industrial units in backward areas.
The government plans to bring down the current rate of central sales tax (CST) from 4 per cent to 2 per cent by April 1, 2006 and ultimately phase it out by April 1, 2007. The government plans to introduce the integrated goods and services Act, once CST is phased out. According to Ramesh Chandra, secretary, VAT panel, “CST is a barrier in implementing VAT and the empowered committee are working towards removing it.”

According to a notification by the government, shipping companies will not be able to claim tonnage tax on revenues from selling ships. Earlier, shipping companies could claim benefits under Section 33 AC of the Income Tax Act, if the sale proceeds were utilised for acquisition within a year. The notification, which is effective from April 1,2005 has specified that fees from maritime consultancy, maritime education and handling of cargo and ship management will be considered as income from shipping activities, which will be subjected to tonnage tax.

Delhi government has failed to utilise the funds, amounting to Rs 56.76 crore, which it had received from the Centre for implementing 127 centrally sponsored schemes as of March 2004. The report released by the Comptroller Auditor General has observed that outstanding loans given by Delhi government to local bodies, PSUs and government departments increased by almost 21 per cent during 2004-05.

The Kerala cabinet has allowed a two-year tax waiver for tea and coffee estates. However this waiver would not be applicable to plantations owned by companies. 

INFLATION

The annual inflation based on wholesale price index has dropped marginally to 5.05 per cent during the week ended March 26, 2005 from 5.11 per cent registered during the previous week. The annual inflation rate was at 4.64 per cent in the corresponding week last year.

The WPI rose to 189.4 from 189.1(Base: 1993-94=100) during the week in review. The index of primary articles’ group rose from the previous week’s level to 185.7 due to a considerable rise in the prices of food articles. The index of fuel, power, light and lubricants group remained unchanged at previous week’s level at 287. The heavy-weighted (63.7 per cent) manufactured products’ group rose marginally to 168.9 due to a rise in the price indices of beverages, tobacco and tobacco products, textiles, paper and paper products, chemical and chemical products, basic metals and machinery and transport equipments. 

The latest final index of WPI for the week ended January 29, 2005 has been revised downwards; as a result both, the absolute index and the implied inflation rate moved up to 188.3 and 5.14 per cent instead of the provisional levels of 188.5 and 5.25 per cent, respectively. 

Maintaining the current moderate level of inflation in coming weeks is a major challenge in front of the government. Inflation is expected to have ripple effects, if global crude oil prices remain stubborn at around $ 58 per barrel and are passed on to domestic sphere. 

Labour 
According to 59th round of the National Sample Survey, as high as 58 per cent of the urban population (sample size = 878.4 lakh urban population) is employed in the service sector. The activities, which absorbed more than half of the urban working population, are trade, retail and wholesale categories taken together. The services sector, in case of rural working population, however, could absorb only 11.6 per cent of the total rural population (sample size = 32138.5 lakh rural population). 

Agriculture as an economic activity has generated employment for less than a quarter of urban working population. In contrast, agriculture remains the main sector for providing employment to rural masses, where almost 76 per cent of the total rural working population is engaged in farm related activities. 

The manufacturing sector, including core infrastructure employs about one third of the total urban working population by providing employment to about 33.1 per cent of urban workers. It accounts for 12.5 per cent as far as the rural employment is concerned. 

EXTERNAL SECTOR

On Friday, April 8 2005, the commerce minister announced annual Trade Policy for the financial year 2005-06. The main features of the policy are spelt out below:

• Cess levied under different Commodity Board Acts on exports of all agricultural and plantation commodities, has been abolished. This step is aimed at reducing the burden of indirect taxes on the exporters.

• Relaxation of the norms for duty-free imports of gems and jewellery.


• Announcement of special package for the marine sector to help fishermen and their families to overcome tsunami setback. This package includes duty-free import of chemicals for food processing and import of technology for tuna fishing at a concessional rate.

• Extension of the benefits of duty-free replenishment certificate (DFRC) to brass scrap, paper and paper board, additives and dye stuffs so as to make their import cheaper.


• Establishment of an inter-state trade council for providing a proper institutional dialogue mechanism between Centre and states, to boost international trade. Coherence and consistency among trade and other economic policies of both Centre and states are vital for achieving Foreign Trade Policy objectives.

• Relaxation of some of the norms for Export oriented units (EOU) in an effort to allow smoother functioning and to remove procedural annoyance.

• Dilution of exports obligation provisions under the export promotion capital goods (EPCG) scheme and sops for the agricultural, small-scale and retail sectors.

• End of the facility of borrowings from offshore banking units (OBUs).

With India’s exports growing at faster than expected rate, despite rupee appreciation, the government has revised the export target, for 2005-06, upwards to $92 billion from $88 billion. The strong performance of exports has enhanced Centre’s confidence that India would double its share in the world trade by 2009.

In a move to liberalise the FII investment regime in public sector banks, the government is contemplating to raise FII limits to 24 per cent from the existing 20 per cent. At present FII holdings are close to the ceiling in some public sector banks. With fresh public offering in the pipeline, a low ceiling may affect the subscription of these banks.

The government is not in favour of further liberalisation of policies related to External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs). Since November 2003, financial intermediaries like housing finance companies and banks have been barred from raising funds through the ECB channel, except for providing restructuring packages to textile and steel industries. However, due to a record approval of overseas debt issuance by Indian companies amounting over $10 billion by the end of the fiscal year 2004-05, a review of the policies relating to ECBs and FCCBs is impending. Nevertheless, the regulators are concerned over the consequences of further liberalisation of oversees borrowings, which may result in greater liquidity affecting money supply (through buying of dollars by the RBI) and inflation.

The corporate sector has raised $557.58 million funds through external commercial borrowings in the month of February 2005, with Tata Power leading the bunch, to raise $200 million.

The World Bank’s annual assistance to India, till June 2005, would be over $3.5 billion. It is also likely to extend $450 million, till May, to Tamil Nadu and Pondicherry for reconstruction work in Tsunami affected areas.

China is keen to import more Indian black tea and even help leading Indian firms to set up manufacturing plants.

CREDIT RATINGS

During the period under review, rating agencies like Crisil and Icra held discussion with Sebi with regards to the need for the listed companies to disclose, on a real-time basis any defaults in the settlement of obligations. However, it may be some time before any action is taken in this regard, as Sebi wants to assure itself first that such disclosure will not cause panic and intensify the difficulties of the defaulting companies.

Icra has assigned an A1 rating to Bhushan Limited (BL) Rs. 50 crore CP programme CP/short-term debt programme. The rating factors in BL’s efficient manufacturing operations is reflected in high capacity utilisation and low rejection rates and its improving profitability and cash generation from operations arising out of improving product mix and buoyant steel prices. However, the project risk are mitigated to an extent by BL’s past track record of project implementation, significant progress in achieving financial closure and the reputed consultants appointed for the expansion.

In an another exercise, Icra has reaffirmed the LAA rating assigned to the Rs. 600 crore long-term debt of the Associated Cement Companies (ACC). Sundaram Medical Foundation (SMF), Chennai, has been assigned ‘H1 grade’ in the category ‘general hospital-medium case’. The grade H1 implies that in Icra’s current opinion, the graded institution has the resources and processes consistent with those required to deliver the highest quality of care.

Crisil has assigned a P1+rating to Indiabulls Financial Services’ Rs. 100 crore short-term debt programme. The rating takes into consideration the adequate monitoring and risk management systems of the company in the loan against shares and equity broking business. However, the rating is tempered by the inherent cyclical nature of the equity broking business, with volumes and earnings depending on the level of activity in the equity market.

In an another exercise, Crisil has assigned P1+ rating to Rs. 120 crore issue of Tata industries, while it has also reaffirmed the earlier assigned AA/stable rating to the company’s Rs. 150 crore non-convertible debenture issue. However, the company’s moderately high gearing, especially given the commercial, technological and regulatory risks associated with its investments in emerging business areas has to some extent offset the strength of the ratings.

Theme of the week:

MUTUAL FUNDS

In the recent period, mutual funds (MFs) have attracted a lot of investors’ attention through the initial public offerings of different types of schemes. Since the beginning of the financial reforms, the MF industry has grown substantially in the terms of the number of mutual funds, schemes and amount mobilised. However, there are still some concerns regarding their effectiveness in mobilising savings and their geographical reach. 

A MF is a financial intermediary that allows investors to pool their savings with a predetermined investment objective. The fund manager of the mutual fund is responsible for investing the pooled money into specific securities (usually stocks or bonds). The investor of a MF buys units of the mutual fund and becomes a shareholder. The unique feature of mutual fund is that the investor's risk is diversified across companies, sectors and securities. 

History of Mutual Funds
In 1822, the first mutual fund was started in Netherlands, and the second one in Scotland in the 1880's. However, they grew to astounding positions in the United States. Originally they were called investment trusts and the first American trust, the New York Stock Trust, was established in 1889. In early 1920’s number of funds originated in US like the State Street Fund, Massachusetts Investor's Trust (now called MFS), Fidelity, Scudder, Pioneer, and the Putnum Fund. The Wellington Fund, the first balanced fund that included both stocks and bonds, was founded in 1928, and today is a part of the giant Vanguard Funds Group. At the end of 1960's there were 244 MFs in the US as compared to 10 MFs in 1920. 

The MF history in India can be roughly divided into four phases; phase one from 1963 to 1986, second phase from 1987 to 1992 and third phase from 1993 to 2003 and the fourth phase is the present scenario. 

Formation of UTI and its growth (1963 – 1986)
The Indian mutual fund industry began with the formation of the Unit Trust of India (UTI) in 1964, by the Government. UTI was formed as a non-profit organisation governed under a special legislation, the Unit Trust of India Act 1963. It was formed with the purpose to mobilise savings and investments. UTI functioned under the regulatory and administrative control of the Reserve Bank of India (RBI). In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control. The first scheme launched by UTI was Unit Scheme 1964 (US-64). UTI had a monopoly up to 1987 and during this period, it launched a series of equity and debt schemes and established itself as a household name with around 3 million unit-holders accounts, and assets under management of Rs.4,563 crore, by mid 1987.

Entry of Public Sector (1987 – 1992)
In 1987, the number of mutual funds expanded with the entry of public sector mutual funds, i.e. funds promoted by public sector banks, namely, State Bank of India (SBI), Canara Bank and financial institutions, such as Life Insurance Corporation of India (LIC), General Insurance Company (GIC) and IDBI. SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987, followed by Canbank Mutual Fund (December 1987), LIC Mutual Fund (June 1989), Punjab National Bank Mutual Fund (August 1989), Indian Bank Mutual Fund (November 1989), Bank of India (June 1990), GIC (December 1990) and Bank of Baroda Mutual Fund (October 1992). At the end of 1993, the mutual fund industry had assets under management worth Rs.47,004 crores.

Entry of Private Sector (1993 – 2003)
Following the implementation of financial sector reforms, private sector mutual funds began their operations from 1993; this not only widened the number of MFs operating in the country but also widened the types of schemes available for investment. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The private sector players, after an indifferent start in the early years, have made a strong impression especially in the larger cities, with a high quality of fund management, sales and customer service. 

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. 

Mutual Funds in India – since February 2003 
In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate entities: the Specified Undertaking of Unit Trust of India and the UTI Mutual Fund. The Specified Undertaking of the Unit Trust of India as at the end of January 2003 had Rs.29, 835 crore assets under management, which included assets of US 64 scheme, assured return and certain other schemes. The UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC, is registered with Sebi and therefore functions under the Regulations of Sebi.

As at the end of March 2005, there were 30 funds, managing assets worth Rs.1,49,600 crores, under 452 schemes. 

Types of Schemes launched by MFs 
In recent years, the MF schemes have diversified considerably thus expanding the basket of instruments to suit the different needs of the investors based on their financial positions, risk tolerance and returns expectations. There are schemes according to maturity period: there are close-ended schemes which have a stipulated maturity period and investors’ can buy the units during the specified period at the time of launch and thereafter, the units can be sold and repurchased only through stock exchanges where they are listed, while open-ended schemes are available for subscription and redemption on a continuous basis. They don’t have a fixed maturity period. Then there are schemes according to investment objectives: growth/equity oriented scheme, Income/debt oriented scheme, balanced fund, money market or liquid fund, Gilt fund, and index fund. 

Growth / Equity Oriented Scheme provides capital appreciation over the medium to long- term as they invest a major part of their corpus in equities; as a result, they are comparatively risky. Income / Debt Oriented Schemes provide regular and steady income as the funds are invested in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Though these schemes are less risky compared to growth/ equity, but they are subject to interest rate fluctuations. Balanced Funds combine the features of both growth and income, as such schemes invest both in equities and fixed income securities in the proportion indicated in the offer documents. These are appropriate for investors looking for moderate growth. These funds are affected by both the fluctuations in share prices and in interest rates. 

Money Market or Liquid Fund are also income funds and their aim is to provide easy liquidity, preserve capital and generate moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less as compared to other funds. These funds are appropriate for corporates and individual investors to park their surplus funds for short periods. Gilt Funds invest exclusively in government securities. Government securities have no default risk. Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error".

Then, there are sector specific funds that invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds

Tax saving schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues e.g. Equity Linked Savings Schemes (ELSS). 

Fund of Funds (FoFs) is a financial instrument that invests in other MF schemes rather than in securities. However, a FoFs scheme is not permitted to invest in any other FoFs scheme, nor in any other assets than the schemes of MFs, except to meet the liquidity requirements for the purpose of repurchases or redemptions.

Growth of MF
The asset under management (AUM) of MFs has increased substantially from Rs 25 crore in 1964 to Rs 4564 crore in March 87. From 1987, mutual funds sponsored by public sector banks entered the market and the AUM increased to Rs 47,004 crore as of end 1993. With the entry of the private sector and foreign MFs, the AUM has increased substantially and as of end March 2005 it stood at Rs 149,600 crore.

It has been expected that with the entry of different players and diversification of products, the AUM would increase substantially. However, as shown in Table 1, the AUM over the period of 5 year has been hovering around Rs 1,00,000 crore, while the deposits with the banking sector and government sponsored investment avenues have attracted substantial amount of funds. 

For the past few years, the biggest challenge facing the mutual fund industry has been that the funds moved into debt schemes or income scheme wherein the investments were only in debt instruments. The AUM under debt/income schemes almost doubled from Rs 55,308 during 2000-01 to Rs 1,10,255 crore in 2003-04 given the buoyancy in the debt market (Table 2).However, as the interest rates began firming up in 2004-05, there has been a net outflow of Rs 5244 crore, thereby dragging the AUM to Rs 1,06,250 crore. 

It has been only following the buoyancy in the stock markets, that there have been net inflows in the growth and equity oriented schemes. In 2002-03, there had been a net inflow of just Rs 43 crore. It rose to Rs 7219 crore in 2003-04, but as the stock markets turned volatile the redemptions have increased and therefore the net inflows have been lower at Rs 7,100 crore in 2004-05 (Table 3).

The investors seem to lose their appetite for balanced schemes as the AUM has fallen from Rs 19,274 crore in 2000-01 to Rs 4,867 crore in 2004-05 (Table 4). From a net inflow of Rs 2,782 crore in 2000-01, there has been a net outflow of Rs 5,354 crore in the next year. It has been only in 2004-05 that there has been a net inflow of Rs 345 crore 

Since August 2004, there has been a sharp spurt in the IPOs of MFs (Table 5). Given the bullish stock market sentiments, the MFs have evoked considerable interest among investors and thereby are able to mobilise huge amounts, in fact in the month of March alone Rs 9,990 crore have been mobilised. While subscriptions under fresh schemes have increased substantially, mobilisations under the existing schemes barring March have remained almost range bound (Table). It appears that some part of the fresh subscriptions is made by diverting funds from the existing schemes. Hence, the motive for IPOs, apart from offering different choice to the investor could also be to increase the AUM due to the near stagnant inflows in the existing schemes despite the on-going bull run in stock markets. However, the focus of the MF should be on getting more investors to invest in the existing schemes and see the equity story as a long-term proposition. 

Interestingly, in March the amounts raised through fresh IPOs and existing schemes have been much higher than the previous months. There has been a net outflow during the month to the extent of Rs 3,298 crore where redemption/repurchases at Rs 101,837 crore have exceeded total sales during the month at Rs 98,539 crore. 

Also, it appears that the MFs have not invested the proceeds mobilised as inferred from their transactions on stock exchanges. The gross purchases for March has been Rs 6,489 crore and gross sales Rs 4,950 crore, resulting in net investment of Rs 1,539 crore (Table 6 ). These figures are no where near the amounts mobilised during the month. The situation is similar even for other months of the financial year. 

Some of the Recent Changes in Investment Options of MFs
Permission to invest in foreign equities

Pursuant to the Government’s decision to allow MFs to invest in equities of listed overseas companies, MFs are permitted to make investments in companies, which have a shareholding of at least 10 per cent in an Indian company listed on a recognised stock exchange in India (as on January 31 of the year of investment). The overall cap for the entire MFs industry to invest in ADRs/GDRs, foreign equity and debt securities has been set at US$ 1 billion. Each MF individually is permitted to invest 10 per cent of their net assets as on January 31 of each relevant year, in foreign securities with the limit of a minimum of US$ 5 million and a maximum of US$ 50 million. 

SEBI has allowed MFs to trade in equity based derivatives. The ‘hedging’/‘portfolio balancing’ should be clearly marked while initiating any derivatives position. At no point of time, the derivative position should result in actual or potential leverage or short sale/short position on any underlying security, that is, all derivative positions should be backed by cash or stock (stocks portfolio for index derivatives) as the case may be at the time of exposure. Each MF should have a maximum derivative net position of 50% of the portfolio (i.e. net assets including cash). 

The MFs can hold different positions involving multiple derivatives positions on the same underlying. With regards to disclosure and accounting norms, each MF has to disclose the maximum net derivatives exposure in terms of the percentage of portfolio value, the limits 
on derivatives exposure per scrip/instrument and derivatives positions and limits. The data on actual exposures has to be disclosed in the half yearly portfolio statements. While calculating the industry exposure on monthly basis, the total exposure per scrip including derivatives exposure, has to be considered

Unit holding pattern of MFs
As per the report put out by Sebi on unit holding pattern of mutual funds industry, there were total number of 1.6 crore investor accounts (it is likely that there may be more than one folio of an investor which might have been counted more than once and therefore the actual number of investors could be less) as on March 31, 2003. Of these, 1.56 crore were individual investors, accounting for 97.42 per cent of the total and contributing Rs 32,691 crore which is 41.07 per cent of the total assets. The total number of investor accounts was lower in 2003 as compared to 2002 as the information included was only of UTI Mutual Fund as it is within the regulatory ambit of Sebi, while the data on Specified Undertaking of UTI was not included. 

Corporates and institutions who account for only 2.04 per cent of the total investor accounts, contribute a sizeable amount of Rs 45,470 crore which is 57.12 per cent of the total net assets of the MFs. The NRIs/ OCBs and FIIs constitute a very small percentage of investor accounts (0.54 per cent) and contribute Rs 1440.18 crore (1.81 per cent) of net assets. 

Unit holding pattern among private and public mutual funds
Of the total investors accounts, 42.93 lakh accounts, that is, 27 per cent of the total investors accounts are with private MFs and 1.17 crore is with public sector MFs, which is 73 per cent of the total accounts. However, the private sector MFs manage 71.2 per cent of the net assets whereas the public sector MFs own only 28.8 per cent of the assets. Of the total assets managed by private sector MFs, the corporates and institutions account for 66.1 per cent, while individuals for only 31.7 per cent (Table 8). In case of public sector MFs, the individuals accounts contribute to 64.3 per cent of net asset value and corporates and institutions for only 34.91 per cent (Table 9). 

Regulation
There was no uniform regulation of the mutual fund industry till a few years ago. The UTI was regulated by a special Act of Parliament while funds promoted by public sector banks were subject to RBI guidelines of July 1989. The Securities and Exchange Board of India (SEBI) was formed in 1993 as a capital market regulator. One of its responsibilities was to regulate the mutual fund industry and it came up with comprehensive regulations for the industry in 1993. The rules for the formation, administration and management of mutual funds in India were clearly laid down. Regulations also prescribed disclosure requirements. 

The regulations were thoroughly reviewed and re-notified in December 1996. The revised guidelines tighten the accounting and disclosure requirements, net asset values and pricing of mutual fund units. The SEBI (Mutual Funds) Regulations, 1996 have been further amended in 1997, 1998 and 1999. Today, all mutual funds are regulated by SEBI. 

Sebi has been continuously endeavoring to usher in fair practices and ensure that manipulation of the market is effectively dealt with. Some of them are enumerated below. 

Sebi has stated that, in case of open ended schemes, the repurchase price should not be lower that 93 per cent of NAV and sale price not to be higher than 107 per cent of NAV and in case of close ended schemes, the repurchase price should not be less than 95 per cent of NAV. The difference between repurchase and sale price should not exceed 7 per cent of the sale price. 

Further, all MFs are required to disclose the performance of benchmark indices in case of all the schemes. The benchmark indices could be the BSE sensex, S&P CNX nifty, or any other depending on the investment objective and portfolio of the scheme. This would help the investors to analyze the performance of the MF against the benchmark. 

The MFs are required to publish NAV daily in newspapers in case of open-ended schemes and weekly for close-ended schemes. Further, they should publish their performance in the form of half-yearly results which also include their returns/ yields over a period of time, that is, last six-months, 1-year, 3-year, 5-eyars and since inception of the scheme. 

It was found out that there was manipulation of the regulations while applying the NAV for redemptions so that the investor gets the NAV of the previous day and not of the relevant day. Sebi directed the MFs to adopt uniform cut-off timings for applying NAVs both for subscriptions and redemptions. This is applicable to all schemes/plans in case of purchases/ redemptions, valid applications received up to 3 pm along with the local cheque or demand draft payable at par at the place where the applications are received, the closing NAV of the day on which application is received should be applied. But, in case of applications received after 3 pm (in case of liquid schemes, the time limit is set at 1 p.m.), the closing NAV of the next business day is applied. If the outstation cheques/demand drafts not payable at par at the place where the application is received, then closing NAV of the day on which cheque/demand draft is credited should be applicable. 

In view of the various advertisements put out by some of the MFs, wherein the risk factors have not been clearly specified, Sebi has made it mandatory that all advertisements should state “Mutual Fund investments are subject to market risks, read the offer document carefully before investing”. Even in audio-visual media like television this statement should be on display for at least 2 seconds in a legible font. 

Also, some of the MFs operated some of the schemes for some exclusive investors, as a result there were schemes with very few investors. The Sebi, therefore, issued guidelines stipulating the minimum number of investors in each MF schemes. Each scheme/individual plan(s) is required to have a minimum of 20 investors and no single investor should account for more than 25% of the corpus of such scheme/plan(s). 

Challenges for the MF industry
The MF has been positioning itself as a growth and sunrise industry, they have been set up with the purpose of mobilising savings of the households and invest the proceeds in stock markets. Their performance on both these accounts has not been encouraging as the total assets under management for the past few years have remained stagnant and they have not been major players in stock markets. 

The industry has seen shifting of assets from one asset class to another and one fund house to another without any significant growth in aggregate assets. 

Mutual funds in their present state are focused only in major metros and mini metros, thus a large section of potential investors remains outside the reach of the industry. Though attempts have been made to expand the reach, for eg. Indian Post and IDBI- principle launched a scheme for distribution through select post offices. 

Apart from reach, mutual fund products are perceived to complex by investors, though various awareness programmes are being carried out to educate the investors. Recently, various investor awareness programs have been conducted by the MFs. Also, to foster professional standards in the operations of MFs, AMFI in association with the NSE has developed a self-study and testing/certification programme for the employees and distributors of MFs. Further, AMFI in consultation with the SEBI, has made it mandatory to all existing personnel of MFs/AMCs, who are engaged in sales, marketing and employees to complete the certification process. Despite these efforts, their reach is limited and awareness among the investors is still low. 

The biggest problem with MFs is that they have failed to demonstrate effectiveness of their investment process for generating sustainable investment return with a few exceptions. As a result, MFs are seen as momentum chasers rather than professional investment managers. Hence the assets have been garnered based on performance of the MF rather than confidence of the investors. This is reflected in the pattern of flow of funds whereby the last quarter performance is the biggest driver for attracting money. The MF needs to demonstrate robustness of their investment management process rather than last quarter return to ensure investor participation through the ups and downs of the market. Investors need to choose the fund based on its process rather than the end result. This has forced the MFs to be short-termism and thereby hampered the growth of the MF industry. In the developed countries, MF mobilise amounts at par with banks, but in India they are no where near the deposits moblised by the banks. 

As an Aside, Unit Scheme 1964 (US –64)
US-64 was a flagship scheme of the erstwhile UTI with over 20 million investors. The scheme was originally launched as a debt fund and was considered very safe. It provided high returns to the investors, especially in the first half of 1990s. the scheme encountered difficulties in July 1998, with reports that the original corpus of the scheme had been eroded to the extent of Rs 1,098.5 crore, as a consequence of which, its reserves showed a negative balance. This shook the confidence of investors in the scheme.

UTI consitutied a committee under the chairmanship of Mr Deepak Parekh in October 1998 to undertake a comprehensive review of the functioning of the scheme and recommend measures for sustaining investor confidence and to strengthen the scheme.

Following the recommendations of the committee, mid-course reorganisation and portfolio rebalancing of US 64 was effected by UTI, which by the end of the year led to positive reserves. A number of measures were also taken by the government: tax relief was granted in the budget for 1999-2000. A swap arrangement was worked out whereby the special unit scheme (SUS 99) was created to which PSU stocks of US –64 were transferred on May 1, 1999. Government subscribed to SUS 99 through issue of dated government securities worth Rs 3,300 crore. From negative reserves of Rs 1098.5 as on end –June 1998, US –64 recorded positive reseves of Rs 130 crore as at end June 1999 and showed a substantial increase in reserves to Rs 3492 crore by end – June 2000. Till March 2001, the scheme’s sales were higher than repurchases, thus the difference between NAV and repurchase price did not impact the scheme. However, in the months of April and May 2001, the scheme faced substantial redemption with negligible sales, thus impacting the NAV of the scheme. This coincided with the meltdown of the stock indices following the bust of the IT bubble. The equity portfolio of the scheme also reported significant depreciation during the first half of 2001. UTI, therefore, announced on July 2, 2001 suspension of the sales and repurchase of US-64 for a period of upto six-months to enable it to make strategic changes to the scheme and the portfolio. 

The freeze on sales and repurchases of the units raised the issues of safety and above all, liquidity of the scheme. As an interim liquidity measure, UTI announced that small investors holding upto 3000 (subsequently increased to 5000) units of the US-64 on June 30, 2001could avail of the repurchase facility from August 2001 to May 31, 2003. the repurchase price was fixed at a face value of Rs 10 per unit. Thereafter, the price was increased by 10 paise every month and would become Rs 12 per unit in May 2003. 

This triggered a debate about the special status enjoyed by the UTI as against the other mutual funds. Following the passing of Sebi (MF) regulations, 1996, all the MFs were under the regulatory ambit of Sebi while UTI continued to be governed by the provisions of UTI Act, 1963. It was considered whether UTI too could be under the purview of Sebi and adhere to the guidelines issued by it. The other issue was the feasibility of assured returns schemes and the need to move towards NAV based schemes

In October 2002, the Union cabinet approved the repeal of the UTI Act, 1963 through an ordinace. On the repeal of the Act, the assets and liabilities of UTI have to be segregated into two entities: the UTI Mutual Fund which issued NAV based units came under the regulatory ambit of Sebi and Specified Undertaking of UTI which managed the schemes comprised of US –64, SUS 1999 and other assured returns schemes. 

Further, Sebi (MF) regulations stated that no return could be assured in a scheme unless such returns are fully guaranteed by the sponsor of AMC and the same is disclosed in the offer document. As various assured returns schemes faced difficulties in meeting their commitments, Sebi directed them to honour it. 

 

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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