Submitted By: Dev Raj Dhungana Roll No: 10107 UTI Case Analysis Case Discussion Questions 1.

Explain in detail the reasons behind the problems faced by US-64 in the mid 1990s. Were these problems the sole responsibility of UTI? Give reasons to support your answer. The reasons behind the problems faced by US-64 include: a. Acquiring public sector unit stocks: UTI made a huge investment of around 70 billion in Public Sector Unit (PSU) stocks with the hope of distributing higher dividends. But PSU stocks were the poor performing ones. While making this investment, it forgot its identity as a scheme that had to provide fixed regular returns to its investors by maintaining a balanced portfolio. b. Lack of proper fund management and internal control systems: Media reports came to be true that UTI lacked proper fund management and internal control systems. This lead to a severe decline in market value of equity of UTI from 82 billion to 42 billion. c. Portfolio of equity being greater than debts: The equity holdings of UTI climbed from 30% to 70%. But a typically balanced mutual fund doesnt hold more than 30% equity. The case of UTI is just reverse. It is holding 70% of equity. This kind of equity holding was an example of a reckless investment decision made by UTI. Yes, I think the problems were the sole responsibility of UTI. Ambitious plans to distribute higher dividends investing in equities (esp. PSUs), lack of proper management and internal control systems, misbalancing the portfolio by holding higher portion of equity were all the faults UTI made by itself. Hence, UTI should be held responsible for these hasty decisions.

2. Analyze the steps taken by UTI to restore investor confidence in US-64. Comment briefly on the efficacy of these steps? Steps taken by UTI to restore investor confidence are: a. b. c. d. e. f. Selling PSU stocks through negotiations to the highest bidder Forming a committee to review and recommend members to increase transparency and accountability under the chairmanship of Dipak Parekh (chairman of HDFC) Using fresh funds to strengthen the capital base (around Rs 5 billion) Freeing tax in incomes for the next three years to attract more investors Emphasizing on performance evaluation of all schemes Formation of two independent groups to manage equity and debt portfolio

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Initiative to make US-64 scheme NAV driven

Analysis and Efficacy of these steps a. b. c. d. e. UTI became more proactive in fund management Transfer of PSU schemes to SUS 99 Exit from illiquid stocks Recast of portfolio and greater weightage to stocks such as Infosys, NIIT and FMCG sectors by reducing its weightage in commodity stocks. Stocks like Mastek, Visual software and Gujarat Ambuja entered the top 50 list whereas scrips like Thomas cook and Carrier aircon were out

3. As a market analyst, would you term US-64 a safe mode of investment? Justify your stand with reasons. Yes, I would term US-64 as a safe mode of investment because if we live in present (forgetting the failure stories of UTI before), it has taken a number of steps to correct previous mistakes. The implementation of these steps has improved the performance of UTI dramatically. It has improved its NAV figures, exited from illiquid stocks, balanced its portfolio well, used independent groups and experts to monitor performance, and has been proactive in fund management. It has worked well to eliminate all of its previous weaknesses; it is no more a mismanaged company. Also UTI, being one of the largest mutual funds in India, is government backed. Investors will have lesser fear because of this reason as they think that in case of any unwanted incidents, government will rescue the trust.

4. US -64 should have been NAV driven from the very beginning like other mutual funds. Comment. No, I dont think that US-64 should have been NAV driven from the very beginning. To attract small investors in the capital markets, practice of not declaring NAV in the beginning would be beneficial. In the first few years, the investors would have been discouraged as the NAV figures would be low due to stock market fluctuations, which could have reduced the investors confidence to invest in US-64. Though it can be termed as a safe mode of investment now, the NAV driven policy from the very beginning would prove to be an unsafe mode due to low NAV figures.