With the government formally splitting the beleaguered Unit Trust of India by handing over the net asset value-based schemes to a company floated by Life Insurance Corporation and three leading banks, the stage is set for a general referendum among investors.

The biggest challenge before the new management would be the conversion of 11 closed-ended equity schemes to open-ended, and providing the investors in these schemes with an exit option.

According to the agreement signed by the new sponsors, 43 net asset value-based schemes -- bunched as UTI-II, with aggregate assets of about Rs 15,000 crore (Rs 150 billion) -- will stand transferred to a new asset management company floated by the Life Insurance Corporation, State Bank of India, Punjab National Bank and Bank of Baroda.

While UTI-II is slated to start operations from February 1, the government will continue to run the Rs 31,000 crore (Rs 310 billion) UTI-I, comprising US-64 and assured return schemes.

Under mutual fund regulations, any changes in the attributes of any scheme, including change in the funds' management has to be accompanied by an option to the existing investors to either stay on with the scheme or exit.

This is analogous to the open offer which listed companies give to shareholders in the case of a takeover or a merger. Unitholders, in this respect, are treated at par with shareholders.

Exit is provided at the prevailing net asset value of the scheme - and during the period of the option, no exit load is charged to the investors.

However those who exit after the period of offer will have to bear the usual charges, specified and levied by the fund.

Interestingly Sebi has not specified any specified period for the exit option that is to be decided by the trustees of the new asset management company.

Industry sources said that the time period usually varies from one week to a maximum of 15 days.

The time period however can be more depending on the number of investors being serviced and the kind of places they are drawn from.

For instance, a fund which has investors living in rural areas will require more time than a fund with bulk of its investors living in the metros.

UTI has already approached the Securities and Exchange Board of India and Central Board of Direct Taxes with a proposal to merge its five series of closed-ended equity-linked savings scheme, and Master Equity schemes (MEP-93/94/95/96/97).

The merged scheme would have a portfolio of Rs 720 crore (Rs 7.20 billion) with 12 lakh (1.2 million) investors. The merged scheme would have a single weightage average net asset value and is expected to be launched by March 3, 2003.

UTI has already received approval from the capital market watchdog to convert its closed-ended scheme, Master Value Unit Scheme, into an open-ended scheme. The scheme, a star performer, has a corpus of about Rs 121 crore (Rs 1.21 billion).

Delhi-based Value Research ranks the scheme fourth among 110 schemes.

Recently, the UTI board also approved the proposal to make Mutual Fund Unit Scheme 1986 (Mastershare) open ended.

A senior UTI official admitted that UTI could face some redemption pressure once these closed-ended schemes are converted into open-ended.