TOPIC: What is UTI and their objective and explain their role in industrial development.

Submitted to:

Reetu Mam

Unit Trust of India (U.T.I)

IntroductionThe Unit Trust of India is a statutory public sector investment institution established under the Unit Trust of India Act, 1963. It began functioning on Ist July, 1964. It commenced its operations with an initial capital of Rs.5 crores contributed as follows -Reserve Bank of India ... ... Rs.2.5 croreLife Insurance Corporation ... ... Rs.75 LakhsState Bank of India ... ... Rs.75 Lakhs

Scheduled Banks and other

Financial institutions ...Rs. 1 crore

Unit Trust of India (UTI) was established by an Act of Parliament to encourage and mobilize savings of small investors through the sale of ‘Units’, and to channelise these resources into corporate securities. Over the years, it has rapidly grown and diversified to be an important part of Indian Financial System. The sale of units of UTI under all schemes aggregated to Rs 14,000 crore during 1998-99 as against Rs 11,200 crore during 1997- 98. Size and complexity of UTIs operations are reflected in an asset portfolio of over Rs 55,200 crore and investor base of about 450 lakh investor accounts; a distribution network of 52 branch offices; an array of 79 attractive and innovative savings plans/funds; and portfolio exposure in various companies covering all major profitable companies in the public, private, joint and financial sectors. UTI is major investor in Government Securities and Money Market Instruments. During 1998-99 (up to April 1999), the financial assistance sanctioned and disbursed by UTI aggregated to Rs 3,797 crore and Rs 2,396 crore respectively. UTI’s investment in the corporate sector is in the form of equity and preference shares, debentures, term loans and special deposits.

For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens. In mid- 1980s public sector banks were allowed to open mutual funds. The real vibrancy and competition in the MF industry came with the setting up of the Regulator SEBI and its laying down the MF Regulations in 1993.UTI maintained its pre-eminent place till 2001, when a massive decline in the market indices and negative investor sentiments after Ketan Parekh scam created doubts about the capacity of UTI to meet its

obligations to the investors. This was further compounded by two factors; namely, its flagship and largest scheme US 64 was sold and re-purchased not at intrinsic NAV but at artificial price and its Assured Return Schemes had promised returns as high as 18% over a period going up to two decades.

The Unit Trust of India (UTI) has the world's largest share in domestic mutual fund industry. UTI Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. The Bank today is capitalized to the extent of Rs.232.86 Crores with the public holding at 47.50 %. Mr. U.K. Sinha is the Chairman and Managing Director of UTI AMC.

UTI launched the first Indian off-shore fund. “The India Fund” (listed on the London Stock Exchange) in July 1986 and the second fund called “The India Growth Fund Inc.” was launched in August 1988 which is listed on the New York Stock Exchange. In February 1997 UTI launched “The India Access Fund” which is the first off-shore India Index fund, which replicates the performance of the NSE-50 index. In June 1997, UTI also launched the first off-shore debt fund “India Debt Fund”, sector fund “India Information Technology Fund” and India Public Sector fund. India Information Technology Fund was ranked Number One in its category by the Lipper International for CY 1998. UTI’s international exposure includes its support to the development of the Unit Trusts in other developing countries like Sri Lanka, Bhutan and Egypt providing technical advice as well as participation in the equity capital.

UTI was different from similar institutions in other countries in four respects –

Firstly, it was accorded a monopoly status.

Secondly, it combined the functions of management and trustees in body, i.e. the Board of Trustees unlike other countries where manager and trustees are two separate entities.

Thirdly, the initial capital of Rs. 5 crores was contributed by the RBI, the LIC, the SBI and its subsidiaries, scheduled banks and other financial institutions.

Lastly, important tax concessions were granted making investment in UTI especially attractive for investors from small and medium income groups.

Nature of the Trust

The Unit Trust of India is an investment trust. It mobilises the savings of people through sale of units. The savings as collected are invested in the shares and debentures of profit-making companies. The income received by the trust by way of interest and dividend is passed on to the unit holders by way of dividend after meeting management expenses of the trust. The small savers get benefit by participating in the investment schemes of UTI and thus in the industrial prosperity of the country. Investment through UTI results in lower risk of loss and higher return on investments due to professional management by U.T.I.

What are units?

The total investment made by UTI in industrial securities .........(shares, debentures and bonds) is divided into smaller parts called ‘units’. The Unit Trust of India sell units under different schemes and also buys back its own units at the purchase price fixed by it from time to time. Units have a face value of Rs.10 each.

Objectives of UTI

According to the preamble of the UTI Act, the trust was established “with a view to encouraging saving and investment and participation in the income, profits and gains accruing to the corporation from the acquisition, holding, management and disposal of securities.” Unit Trust of India was set up with the twin objective of mobilizing household savings and investing the funds in the capital market for industrial growth. Household sector accounted for about 80 percent of nation’s savings and only about one third of such savings was available to the corporate sector, It was felt that UTI could be an effective vehicle for channelising progressively larger shares of household savings to productive investments in the corporate sector.

The main objectives of UTI are as under -

(i) Contributing to India’s industrial development by transforming household savings into corporate investment.

(ii) To mobilise savings from the small savers;

(iii) To channelise savings to industrial growth;

(iv) To allow investors to participate in the prosperity of the capital market through portfolio management aimed at reasonable return, liquidity and safety, and facilitating orderly development of the capital market.

The UTI offers a variety of saving and investment instruments in the form of units, which are sold primarily to the household savers, assuring them safety, liquidity, regular return and capital appreciation. In a complex financial market, it gives investors the opportunity for a simpler, more secured and convenient method of pooling their resources as it operates on the principle of spreading the risk by investing its fund in a wide spectrum of securities. Diversification of investment and professional expertise are the two important attributes of the Trust.

So we can say that the objective of setting up the UTI was to enable the small investors to share in industrial prosperity, through indirect holding of equities, and to mobilize the savings of the relatively small investors who numerically formed the major section of the saving populace.

Various financial institutions promoted by UTI

Towards creating a diversified financial conglomerate and meeting investor’s varying needs under a common umbrella, UTI has set up a number of associate companies in the field of banking, securities trading, investor servicing, investment advice and training. With the objective of diversifying its activities, the trust has co-promoted the following financial institutions.

1. Credit Rating Information Services of India Ltd. (CRISIL) - It provides credit ratings for companies and financial instruments in the capital market.

2. Infrastructure Leasing and Financial Services Ltd. (ILFS) - It caters to the needs of developing infrastructural facilities and also provides merchant banking services.

3. Stock Holding Corporation of India Ltd. (SHCIL) – It provides clearing house, safe custody and transfer register facilities to assist speedier transfer of securities.

4. Canfin Homes Ltd. – It provides finance to individuals for construction and purchase of houses and flats, major renovation of existing houses and financing of public sector housing schemes.

5. Technology Development and Information Company of India Ltd. (TDICI) – It provides capital, financial, techno-managerial guidance and information services to indigenous and high tech ventures.

6. Tourism Finance Corporation of India (TFCI) – seeks to meet the rising financial needs of the tourism industry.

7. Over the Counter Exchange of India (OTCEI) – to provide listing facility to new and small issues at low cost.

8. UTI Bank Limited – With the objective of providing banking services to UTI and the Unit-holders and to enable customers to avail efficient and quality service that meet his specific needs, UTI became the first to launch the Bank named UTI Bank Ltd. – In private sector after the deregulating in the banking sector which commenced its operations from April 2, 1994. It has its registered office at Ahmedabad and has 7 branches at present. The bank uses the latest information technology and telecommunications.

9. UTI Investor Services Limited (UTI ISL) – The Trust has set up a subsidiary in 1993 for computer services named ‘Unit Trust of India Investor Services Limited’ to provide speedier and efficient service to the unit-holder. The subsidiary is operating from the four metropolitan cities and its registered office is at Mumbai. UTI-ISL has since successfully handled 4 of UTI’s schemes viz. Growing corpus and Growing Income Plan & Grihalakshmi, Monthly Income Plan 95 and would be handling more schemes in the coming years.

10. UTI Securities Exchange Ltd. (UTI, SEL) the trust has set up a subsidiary named ‘UTI SEL’ to act as broking house in primary and secondary markets. This is a high tech company and offers fair, transparent and efficient services to suit investors requirements. Its registered office is at Mumbai.

FUNCTION OR ROLE OF UTI (UNIT TRUST OF INDIA)

Functions of UTI

The main functions of UTI are as follows –

To mobilise the savings of the community through sale of units;

To invest the savings so mobilised in corporate securities such as shares and debentures, etc;

To serve unit holders along the length and breadth of the country;

To underwrite the issue of shares and debentures.

UTI plans to introduce new products with emphasis on performing and turn around sectors. UTI launched a Growth Sector Fund in May 1999 comprising a Brand Value Fund, Pharma and Healthcare Fund, Software Fund, Services Sector Fund and Petro Fund with facility of switching from one fund to another for Domestic and NRI investors. UTI is planning an Infrastructure Fund for International investors. UTI also plans to enter insurance and pension fund business.

Role of UTI

Mobilization of Savings: Unit Trust of India right from its inception has been playing a useful role in mobilization of savings of the people. During the period 1965-1993, the trust made net sale of units under different schemes worth Rs. 38,715.00 crores giving an annual average of Rs. 1,251.00 crores.

Pattern of Investment: The most important aspect of the utilization of funds is the pattern of investment of the Trust’s funds. The information available on the direction of the investible funds of the Trust in different investment outlets discloses that the Unit Trust has tried its best to build a balanced flexible investment portfolio composed of corporate securities, government securities and other investments, representing fixed deposits with companies, advance deposits for shares and debentures, bridging finance , application money and money at call and short notice in order to ensure a reasonable return, consistent with the safety of capital and capital appreciation.

Assistance to corporate sector undertaking: By serving as an effect conduit between saving and investment UTI has achieved spectacular success in rendering financial support to programmes of rapid industrialization in the country. Because of the sizeable resources garnered by the Trust, it has been possible for it to pump substantial amount of assistance into the corporate sector undertakings.

Forms of assistance: The Trust has granted financial assistance to the corporate sector by investment in privately placed debentures and loans, underwriting and direct subscription and by way of special deposits. It is to be noted that about 50 percent of assistance of the Trust was in the form of underwriting and direct subscription. About one third of the Trust’s assistance was by way of privately placed debentures and loans.

Purpose wise distribution of assistance : Until recently, major portion of assistance was given to existing projects for their expansion and diversification programmes. However, in recent years UTI provided lion’s share of its funds for other purposes (i.e. working capital).

Sectoral distribution of UTI’s assistance : UTI has invested bulk portion of its funds in private sector undertakings. Private sector enterprises received about 80 percent of the total assistance of the trust.

UTI’s assistance to backward areas : In consonance with the government policy of fostering industrial growth in relatively backward areas, UTI has been providing sizeable amount of assistance to enterprises located in these areas. UTI has provided assistance to backward areas through subscription to privately placed debentures.

State wise distribution of assistance : The Unit Trust of India has provided assistance to industrial enterprise situated in different parts of the country in order to accomplish a geographical diffusion in its investment portfolio. However, a few industrially advanced states have claimed a large chunk of the Trust’s assistance, Five advanced states – Gujarat, Karnataka, Maharashtra, Tamil Nadu and West Bengal received more than 70 percent of the total assistance, the remaining 30 percent was distributed among as many as 16 states and Union Territories. Bigger states like Bihar, Uttar Pradesh and Madhya Pradesh, had to be content with smaller assistance.

CONCLUSION

The trust has done a commendable job in the mobilization of the savings of the community. In the last 30 years of its operations, it garnered the savings of over Rs. 48,800.00 Crores which is really remarkable. This was so because of the intensive efforts put in by the Trust, the introduction of novel and innovative deposit schemes, and the provision of a reasonable dividend rate, together with the benefit of capital appreciation. The taxation policy of the government of India has also helped the trust in its mobilization efforts.