The government is planning to give the administrator of the assured-returns schemes of UTI-I a role in managing its holdings in a number of state-owned companies.

UTI-I is being considered because the government wishes to maximise its returns from its holdings in public sector undertakings.

This follows the success of the Special Unit Scheme-99. The idea, though at a nascent stage, is that the dividend streams from the public sector undertakings will accrue to UTI-I, which will then use the cash to invest in the markets to multiply the government's returns.

B Babu Rao, senior vice-president of UTI Mutual Fund and in charge of the SUS-99, declined to comment on the issue.

Informed sources said the finance ministry was considering the transfer of the government's core holdings to either the SUS-99 or to a specially created fund for managing its investments in various public sector companies.

The idea of shifting the holdings to an asset management company or a national shareholding trust has been floating around for quite some time.

It is widely believed that there will be greater transparency and better asset management if share ownership is transferred to an asset management firm. It will also mean less interference by the administrative ministries.

"Once the government's holdings in state-owned companies are transferred to a special fund, dividend income from the units will be used to maximise returns," a senior government official indicated.

The government may transfer its strategic holdings in Shipping Corporation of India, a number of oil and refinery companies and banks into a new investment fund or the SUS-99.

"Apart from this, the funds generated by the government's sell-off programme in a number of state-owned companies may also be used to maximise returns," the official said.

However, it is not clear as to how the fund will maximise returns on government holdings. It is unlikely that it will trade in government holdings unless these shares are residual investments post-sell-off (as in the case of VSNL). It is also not clear whether investing in other PSU shares or trading in them will be allowed.

The SUS-99 was floated to give the Unit Trust of India its first bailout when a huge gap was discovered between the underlying net asset value of the Unit Scheme-64 (US-64) and its repurchase price.

The government, the sole investor in the SUS-99, gave UTI Rs 3,300 crore (Rs 33 billion) in the form of special bonds. UTI swapped these bonds and placed all its underperforming public sector holdings in the scheme.

While the scheme's net asset value dipped to less than half in the subsequent bear markets, the bull trend in the scrips in recent months has enabled the SUS net asset value to rise above par.

The scheme's net asset value touched Rs 103.55 on May 30, 2003. This means UTI is now in a position to redeem the government's investments in the SUS-99 if it wants. But that is not the current intention.

"An active fund management strategy, combined with the government's divestment programme, has helped the scheme outperform the market," Surojit Saha, fund manager at UTI Mutual Fund, said.

"Since the government is the only investor in the scheme, it is up to it to decide how long it wants to continue with it," Babu Rao pointed out.