"There is a possibility of conflict of interests"

On February 3, 2002, the country's first and largest mutual fund was re-born. Spun off from the 39-year old institution, the Unit Trust of India, UTI Mutual Fund is a pure mutual fund with a corpus of over Rs 15,000 crore (Rs 150 billion) under the 47 net asset value-based Sebi compliant schemes.

Even as UTI Mutual Fund got rid of its historical baggage of assured return schemes, which have been the primary source of its problems in the bifurcation process, in the overall bargain it has lost out in some sense as its mammoth size, its key strength, stands halved.

With the fund now on a level playing field with other mutual funds, it faces a bigger challenge today than ever before -- to maintain its leadership position in the mutual fund market place. The chairman of UTI Mutual Fund and administrator of UTI I, M Damodaran, throws light on some key issues relating to the mutual fund in an exclusive interview with N Mahalakshmi of The Smart Investor.

We understand that the UTI had submitted a proposal to the government to merge mutual fund subsidiaries of the four sponsors with that of UTI Mutual. Where do you think there is a conflict of interests?

In a functional sense today, the fact that our sponsors have their own mutual funds does not impact us in any way. But there is a possibility of conflict of interests in the theoretical sense.

So, the issue must be addressed in a theoretical sense as well. One solution for this is merging these funds. But since some sponsors feel that they want to retain their own funds some other solution must be found. What that solution should be, the government should decide.

What could be the other solutions?

One obvious solution is that they could choose to step out. The other is to lay down  elaborate and reliable guidelines to ensure that those who are dealing with mutual funds in the sponsor's mutual fund subsidiary companies have nothing to do with UTI Mutual.

And this rule should apply not just to the persons managing their mutual funds but even to those who are the link officers of those mutual funds in the parent. I am sure there are other options also.

But having said that, one of our strengths is also our Board of Trustees. They are just a month old and have already met twice. They will be meeting again shortly. They have gone through a detailed presentation on compliance and we are trying to structure a detailed MIS to inform the government about the mutual fund.

This is so that the corrective measures to be taken from their side can be done. The body of people in the trustee company are very serious, and that I think, is a great comfort.

So, this may actually act as an effective safeguard against any possible conflict of interests in future. Even if it is on a theoretical level, it should be addressed especially because the Joint Parliamentary Committee has recommended that the issue should be resolved.

What about Unit Scheme 64 -- now that it is going to be converted into bonds, what will be the investment strategy of the fund? How are the borrowings of the fund being tackled?

We use sales proceeds of shares to repay borrowings to reduce the interest expense. We have reduced the interest cost significantly over the last 18 months. Compared to an average interest cost of 10 per cent then, we are down to about 6.5 per cent now. 

That's a significant reduction. As for the strategy, the fund will make use of market opportunities to book profits. The aim is to minimise the shortfall over time.

What about expenses for schemes in the UTI Mutual Fund? Now that you will operate like a pure mutual fund, will you charge a higher investment management fee?

The expenses will be less than one per cent for all funds. The four sponsors, as of now, have come together to form the asset management company only because of the government's directives.

The government had made it clear that eventually the UTI Mutual Fund will be privatised. So as of now the sponsors are not really looking at making profits from this venture.

What about a strategic sale? Is it still a possibility? Why haven't you been able to finalise any big sale till now?

Strategic sale is one area where the UTI I and the UTI Mutual Fund will work together to realise the best value for their investments.

We haven't done any major sale till now because we haven't got the right kind of price. We are looking at a significant premium over the market price. We are waiting for the right opportunity, and I am sure it will happen.

What systems have you put in place to make sure that UTI I and UTI Mutual Fund are managed as different entities?

The funds are managed separately. No person is common to both these organisations except at the topmost level -- that is in any case not at the fund management level. All dealings are done separately. In fact, we have separate dealers for the two entities.  Besides, the objectives for the two sets of schemes are quite different.

The UTI I schemes are assured return schemes where the government is committed to bridge the shortfall, if any. In that sense, their investment objective is very different. In UTI Mutual Fund, on the contrary, the objective is to perform better than the benchmark indices and peers.

What about erstwhile UTI's presence on the board of various companies -- won't it be affected because of the bifurcation of UTI into two entities?

Well, the UTI Mutual Fund will not have a presence on the board of any company. We are consciously doing this for the sake of good corporate governance  practices. Since we are competing with other mutual funds in the marketplace and will be active in the secondary market, it may not be construed as good governance to hold on to the board seats, which makes us privy to market-sensitive information on respective companies.

UTI I will have its board representative because of its very large holdings, but there we are making it a policy to have only nominee directors as board representatives.

UTI officers will not hold board positions any longer. In companies where our holdings are not so large, we are withdrawing voluntarily.

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