Of all the recent encounters of the Indian public with the much-celebrated forces of the market, the Unit Trust’s US-64 debacle is the worst. Its gravity far exceeds the stock market downswing of the mid-1990s, which wiped out Rs. 20,000 crores in savings. The debacle is part of the economic slowdown which has eliminated one million jobs and also burst the information technology (IT) bubble. This has tragically led to suicides by investors. And then suspension of trading in US-64made the hapless investors more dejected at the sinking of this “super-safe” public sector instrument that had delivered a regular return since 1964. There is a larger lesson in the US-64 debacle for policies towards public savings and public sector undertakings (PSUs). The US-64 crisis is rooted in plain mismanagement. US-64 was launched as a steady income fund. Logically, it should have invested in debt, especially low-risk fixed-income government bonds. Instead, its managers increasingly invested in equities, with high-risk speculative returns. In the late 1980s UTI was “politicised” with other financial institutions (FIs) such as LIC and GIC, and made to invest in certain favoured scrips. By the mid-1990s, equities exceeded debt in its portfolio. The FIs were also used to “boost the market” artificially as an “endorsement” of controversial economic policies. In the past couple of years, UTI made downright imprudent but heavy investments in stocks from Ketan Parekh’s favourite K-10 portfolio, such as Himachal Futuristic, Global Tele and DSQ. These “technology” investments took place despite indications that the “technology boom” had ended. US-64 lost half its Rs. 30,000 crore portfolio value within a year. UTI sank Rs. 3,400 crores in just six out of a portfolio of 44 scrips. This eroded by 60 percent. Early that year, US-64’s net asset value plunged below par (Rs.10). But it was re-purchasing US-64 above Rs. 14! Today, its NAV stands at Rs. 8.30 – a massive loss for 13 million unit-holders.It is inconceivable that UTI made these fateful investment decisions on its own. According to insiders, the Finance Ministry substantially influenced them: all major decisions need high-level political approval. Indeed, collusion between the FIs, and shady operators like Harshad Mehta, was central to the Securities Scam of 1992. The Joint Parliamentary Committee’s report documents this. In recent months, the Finance Ministry became desperate to reverse the post-Budget market downturn. UTI’s misinvestment now coincided with the global technology “meltdown.” US-64 crashed. UTI chairman resigned. Although culpable, he was probably a scapegoat too. The Ministry has kept a close watch on UTI, especially since 1999.The US-64 debacle, then, is not just a UTI scam. It is a governance scam involving mismanagement by a government frustrated at the failure of its macroeconomic calculations. This should have ensured the Finance Minister’s exit in any democracy which respects parliamentary norms. There are larger lessons in the UTI debacle. If a well-established, and until recently well-managed, institution like UTI cannot safeguard public savings, then we should not allow the most precious of such savings – pensions – to be put at risk. Such risky investment is banned in many selfavowedly capitalist European economies. In India, the argument acquires greater force given the poorly regulated, extremely volatile, stock market— where a dozen brokers control 90 percent of trade. Yet, there is a proposal by the Finance Ministry to privatize pensions and provident funds. Basically, the government, deplorably, wants to get rid of its annual pension obligation of Rs. 22,000 crores.

UTI Scam : Robbery Through other Means

—Suman

The line between ‘legitimate’ business and the mafia is getting increasingly diffused. The greater the liberalisation/globalisation of the economy, the more rampant is the loot. Phoolan Devi as a dacoit in the ravines of Madhya Pradesh could not even dream of the type of wealth made as a Member of Parliament. Her wealth at the time of her death was estimated at a

minimum of Rs. 10 crores. But this is small fry compared to the Harshad Mehtas, Bharat Shahs, Ketan Parekhs, Subramanyams etc and the top politicians/bureaucrats/corporate houses with whom they are linked. Phoolan Devi appears as a petty thief compared to these gangsters. The amount robbed through the UTI scam intails thousands of crores — the bulk of which belongs to small investors who have put their life-savings into this scheme.

What is the UTI ?

The Unit Trust of India is the largest mutual fund in the country created in 1964 through an act of parliament. Mutual Funds are financal institutions that invest people’s money in various schemes, giving a ‘gauranteed’ return to the investor. The UTI (of which the US-64 scheme is the largest) was set-up specifically to channel small savings of citizens into investments giving relatively large returns/interest. The US-64 scheme has 2 crore investors, the bulk of whom are small savers, retired people, widows and pensioners. Besides the US-64 the UTI runs 87other schemes giving inverstors various options. But the US-64 has been most popular, giving returns as high as 18% in 1993 and 94.

Genisis of the Scam

Liberalisation of the economy immediately led to the liberalisation of the UTI, throwing it to the mercy of the stock market. In 1992, itself the US-64 scheme was changed from a debt-based fund to one linked to equity. In 1992 only 28% of its funds was in equity; today it is over 70%. Further liberalisation was pushed by Chidambram, as the finance minister of the U F government, who, in 1997, removed all government nominees from the board of the UTI. Besides, the US-64 does not come under SEBI regulations, its investment delails are kept secret (ever depositors cannot know where their funds are being parked) and the chairman has arbitrary powers to personally decide an investment upto a huge Rs 40 crores. Such ‘liberalisation’ is tailor-made for frauds. Not surprisingly, within one year of Chidambram’s liberalisation, in 1998, the UTI crashed, and the new BJP-led government organised a large Rs. 3,500 crore bail-out to prevent default.

It was during this crisis that the new chairman, P.S. Subramanyam, was appointed. Subramanyam was a direct appointee of thug Jayalalitha, who had made his selection a condition for her continuing the support of the then NDA government. Later, though Jayalalitha withdrew from the government, Subramanyam developed close links with the Prime Minister’s Office, and corporative big-wigs. Small investor’s funds were used to promote big business houses, shower favours to politicians, and invest huge amounts in junk bonds....all for a fat commission. Subramanyam functioned like a fascist, arbitrarily transferring hundreds of senior staff, in order to cover his tracks. He was a key player in the Ketan Parekh scam.

Huge amount of UTI funds were channelled into the infamous K-10 list of Keten Parekh stock, such as Himachal Futuristic, Zee Telefilims, Global Tele, DSQ, etc. The UTI continued to buy these shares even when their market value began to crash in mid-2000, in order to prop up the share values of these stocks. The Trust saw its Rs. 30,000 portfolio (value of stocks)

lose half its value within a year since Feb. 2000.

To take just one example on how the UTI operated : In August 2000, much after the software stocks had begun to crash, the UTI bought Rs. 34 crores worth of shares in Cyberspace Infosys Ltd at the huge price of Rs 930 per share. Today the shares have no value and its Lacknow based promoters, the Johari Group, are in jail. But, what is astounding is that it was none other than India’s prime minister, Vajpayee, who, as late as Jan. 31, 2001, laid the foundation stone for the Software Tectnology Park (STP) in Luknow, promoted by this group. (Incidentally the UP government had a 26% share in this STP). Coincidentally, in the four days when the UTI reversed its earlier decision and subscribed to 3.45 lakh shares of Cyberspace, Subramanyam had rung up N.K. Singh (then secretary in the PMO) at least 4 times. It does not take much imagination to link UTI purchases in Cyberspace with Vajpayee. Similar were the investments in DSQ Software, HFCL, Sriram Multitech. and others.

Besides, the UTI also invested in junk bonds like Pritish Nandy communications (Rs. 1.5 crores), Jain Studios(Rs.5 crores), Sanjay Khan’s Numero Uno International (Rs. 7.5 crores), Malavika Spindles(Rs. 188 crores) etc. This amounted to nothing but handing over people’s money (investments) to the rich and powerful. Thereby thousands of crores were siphoned off to big business and prominent individuals, with the UTI chairman, bureaucrats and politicians taking their cuts.

But this was not all. The fraud continues even further. With knowledge that the UTI was in a state of collapse, the Chairman organised a high profile propaganda campaign promoting UTI (spending crores of rupees on the top advertising company, Rediffusion), while at the same time leaking information to the big corporates to withdraw their funds. The Chairman thereby duped the lakhs of small investors through false propaganda, while allowing windfall profits to the handfull of big corporates who had invesed in UTI.

So, in the two month prior to the freezing of dealings in UTI shares, a gigantic sum of Rs. 4,141 crores was redeemed. Of this Rs.4,000 crores (97%) were corporate investments. What is more,they were re-purched at the price of Rs. 14.20 per share (face value Rs.10) when in fact its actual value (NAV — net asset value) was not more than Rs. 8. As a result UTI’s small investors lost a further Rs. 1,300 crores to the big corporates.

In fact these huge withdrawals further precipated the crisis. On July 4, 2001 the board of UTI took the unprecedented step of freezing the purchase and sale of all US-64 UTI shares for six months. Simultaneously it declared a pathetic dividend of 7% (10% on face-value), which is even lower than the interests of the banks and post office saving schemes. Such freezing of legally held shares is unheard of — and is like overnight declaring Rs. 100 notes as invalid for some time. In other words the 2 crore shareholders could not re-invest their money elsewhere — and would have to passively see their share price erode from Rs. 14 (at which they would have purchased it) to Rs 8 — and get interest at a mere 7% on their initial investments. Fearing a back-lash, the government/UTI later announced the ability to repurchase UTI shares at Rs. 10 — i.e. at 30 % below the purchase price.

Imagine the plight of a retired person who would have put a large part of his/her PF, gratuity etc. in the US-64 scheme, considering it the safest possible investment. Not only has the person’s income (interest/dividend) halved overnight, he/she also stands to lose a large part of the investment. So, a person who invested Rs. 1 lakh would now only get back Rs 70,000.

Today, the entire middle class is being robbed of their savings — first it was by the private mutual funds (NBFCs), now by the govt. sponsored mutual fund. Those who gain are the robber barons who run the country’s economics, finance, politics.

The middle-classes, affected by these scame, will soon realise the facts and come out of the euphoria of consumerism that has numbed their senses. They will see through the hoax of globalisation/liberalisation, and will turn their wrath on these so-called pillars of society. It is important that this impending explosion be channeled in a revolutionary direction, or else it will be diverted by the ruling elite into fatricidal clashes. The middle-classes are most prone to fall prey to ruling-class propaganda. But life itself is the best educator. Faced with unemployment, loot of their savings, price rise of all essentials, etc. they will no doubt, join the working class and their peasant brethrens in revolt.

. The UTI Scam

Former UTI chairman P S Subramanyam and two executive directors - M M Kapur and S K Basu - and a stockbroker Rakesh G Mehta, were arrested in connection with the 'UTI scam'.

UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September 25, 2000 for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no buyers for the scrip. The market price was around Rs 830.

The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment advice of the equities research cell of UTI.

The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case. The officals were paid Rs 50 lakh (Rs 5 million) by Cyberspace to promote its shares.

He also received Rs 1.18 crore (Rs 11.8 million) from the company through a circuitous route for possible rigging the Cyberspace counter.

Unhappy investors Quote in 1998

"They were invested blindly in stocks, they have cheated us. I am telling everyone to sell. If they are stupid and offering Rs 14.25 for paper worth Rs 9, why should I let go of the opportunity?”

In 1998, investors of Unit Trust of India’s (UTI) Unit Scheme-1964 (US-64) were shaken by media reports claiming that things were seriously wrong with the mutual fund major. For the first time in its 32 years of existence, US-64 faced depleting funds and redemptions exceeding the sales. Between July 1995 and

March 1996, funds declined by Rs 3,104 crore. Analysts remarked that the depleting corpus coupled with the redemptions could soon result in a liquidity crisis. Soon, reports regarding the lack of proper fund management and internal control systems at UTI added to the growing investor frenzy. By October 1998, US-64’s equity component’s market value had come down to Rs 4200 crore from its acquisition price of Rs 8200 crore. The net asset value (NAV) of US-64 also declined significantly during 1993-1996 due to turbulent stock market conditions. A Business Today survey cited US-64’s NAV at Rs 9.68. The US-64 units, which were sold at Rs 14.55 and repurchased at Rs 14.25 in October 1998, thus were around 50% and 47%, above their estimated NAV. Amidst growing concerns over the fate of US-64 investors, it became necessary for UTI to take immediate steps to put rest to the controversy.

CREATING TRUST

UTI was established through a Parliament Act in 1964, to channelise the nation’s savings via mutual fund schemes. This was done as in the earlier days, raising the capital from markets was very difficult for the companies due to the public being very conservative and risk averse. By February 2001, UTI was managing funds worth Rs 64,250 crore through over 92 saving schemes such as US-64, Unit Linked Insurance Plan, Monthly Income Plan etc. UTI’s distribution network was well spread out with 54 branch offices, 295 district representatives and about 75,000 agents across the country.The first scheme introduced by UTI was the Unit Scheme-1964, popularly known as US-64. The fund’s initial capital of Rs 5 crore was contributed by Reserve Bank of India (RBI), Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) and other scheduled banks including few foreign banks. It was an open-ended scheme, promising an attractive income, ready liquidity and tax benefits. In the first year of its launch, US-64 mobilized Rs 19 crore and offered a 6.1% dividend as compared to the prevailing bank deposit interest rates of 3.75 - 6%. This impressed the average Indian investor who until then considered bank deposits to be the safest and best investment opportunity. By October 2000, US-64 increased its capital base to Rs 15993 crore, spread over 2 crore unit holders all over the world.However by the late 1990s, US-64 had emerged as an example for portfolio mismanagement. In 1998, UTI chairman P.S.Subramanyam revealed that the reserves of US-64 had turned negative by Rs 1098 crore. Immediately after the announcement, the Sensex fell by 224 points. A few days later, the Sensex went down further by 40 points, reaching a 22-month low under selling pressure by Foreign Institutional Investors (FIIs). This was widely believed to have reflected the adverse market sentiments about US-64. Nervous investors soon redeemed US-64 units worth Rs 580 crore. There was widespread panic across the country with intensive media coverage adding fuel to the controversy.

DISTRUST IN TRUSTUnlike the usual practice for mutual funds, UTI never declared the NAV of US-64 - only the purchase and sale prices for the units were announced. Analysts remarked that the practise of not declaring US-64’s NAV in the initial years was justified as the scheme was formulated to attract the small investors into capital markets. The declaration of NAV at that time would not have been advisable, as heavy stock market fluctuations resulting in low NAV figures would have discouraged the investors. This seemed to have led to a mistaken feeling that the UTI and US-64 were somehow immune to the volatility of the Sensex.Following the heavy redemption wave, it soon became public knowledge that the erosion of US-64’s reserves was gradual. Internal audit reports of SEBI regarding US-64 established that there were serious flaws in the management of funds.Till the 1980s, the equity component of US-64 never went beyond 30%. UTI acquired public sector unit (PSU) stocks under the 1992-97 disinvestment program of the union government. Around Rs 6000-7000 crore was invested in scrips such as MTNL, ONGC, IOC, HPCL & SAIL.A former UTI executive said, “Every chairman of the UTI wanted to prove himself by collecting increasingly larger amounts of money to US-64, and declaring high dividends.” This seemed to have resulted in US-64 forgetting its identity as an

income scheme, supposed to provide fixed, regular returns by primarily investing in debt instruments.Even a typical balanced fund (equal debt and equity) usually did not put more than 30% of its corpus into equity. A Business Today report claimed that eager to capitalise on the 1994 stock market boom, US-64 had recklessly increased its equity holdings. By the late 1990s the fund’s portfolio comprised around 70% equity. While the equity investments increased by 40%, UTI seemed to have ignored the risk factor involved with it. Most of the above investments fared very badly on the bourses, causing huge losses to US-64. The management failed to offload the equities when the market started declining. While the book value of US-64’s equity portfolio went up from Rs 7,943 crore (June 1994) to Rs 13,627 (June 1998), the market value had actually declined in the same period from Rs 18,334 crore to Rs 10,029 crore. Analysts remarked that UTI had been pumping money into scrips whose market value kept falling. Raising further questions about the fund management practices was the fact that there were hardly any ‘growth scrips’ from the IT and pharma sectors in the equity portfolio.In spite of all this, UTI was able to declare dividends as it was paying them out of its yearly income, its reserves and by selling the stocks that had appreciated. This kept the problem under wraps till the reserves turned negative and UTI could no longer afford to keep the sale and purchase prices artificially inflated.Following the public outrage against the whole issue, UTI in collaboration with the government of India began the task of controlling the damage to US-64’s image.

RESTORING THE TRUST

UTI realised that it had become compulsory to restructure US-64’s portfolio and review its asset allocation policy. In October 1998, UTI constituted a committee under the chairmanship of Deepak Parekh, chairman, HDFC bank, to review the working of scheme and to recommend measures for bringing in more transparency and accountability in working of the scheme. US-64’s portfolio restructuring however was not as easy as market watchers deemed it to be. UTI could not freely offload the poor performing PSU stocks bought under the GoI disinvestment program, due to the fear of massive price erosions after such offloading. After much deliberation, a new scheme called SUS-99 was launched.The scheme was formulated to help US-64 improve its NAV by an amount, which was the difference between the book value and the market value of those PSU holdings. The government bought the units of SUS-99 at a face value of Rs 4810 crore. For the other PSU stocks held prior to the disinvestment acquisitions, UTI decided to sell them through negotiations to the highest bidder. UTI also began working on the committee’s recommendation to strengthen the capital base of the scheme by infusing fresh funds of Rs 500 crore. This was to be on a proportionate basis linked to the promoter’s holding pattern in the fund.The inclusion of the growth stocks in the portfolio was another step towards restoring US-64’s image. Sen, Executive Director, UTI said,“The US-64 equity portfolio has been revamped since June. During the last nine months the new ones that have come to occupy a place among the Top 20 stocks from the (Satyam Computers, NIIT and Infosys) and FMCG (HLL, SmithKline Beecham and Reckitt & Colman) sectors. US-64 has reduced its weightage in the commodity stocks (Indian Rayon, GSFC, Tisco, ACC and Hindalco.)”To control the redemptions and to attract further investments, the income distributed under US-64 was made tax-free for three years from 1999. To strengthen the focus on small investors and to reduce the tilt towards corporate investors, UTI decided that retail investors should be concentrated upon and their number should be increased in the scheme. UTI also decided to have five additional trustees on its board. To enable trustees to assume higher degree of responsibility and exercise greater authority UTI decided to give emphasis on a proper system of performance evaluation of all schemes, marked-to-market valuation of assets and evaluation of performance benchmarked to a market index. The management of US-64 was entrusted to an independent fund management group headed by an Executive Director. UTI made plans to ensure that full responsibility and accountability was achieved with support of a strong

research team. Two independent sub-groups were formed to manage the equity and debt portion of US-64. An independent equity research cell was formed to provide market analysis and research reports.

The US-64 Controversy RESTORING THE TRUST

HOW THINGS WERE SET RIGHTPSU shares were transferred to a special unit scheme (SUS’99) subscribed by the government in 1998-99.Core promoters such as the Industrial Development Bank of India added around Rs 450 crore to the unit capital, thus helping to bridge the reserves deficit of Rs 2,800 crore in 1998-99.Portfolios were recast in the current quarter to capitalise on the stock surge as the BSE Sensex rose by 15%. Greater weightage was given to stocks such as HLL, Infosys, Ranbaxy, M&M and NIIT. In US-64’s case exposure to IT, FMCG and Pharma stocks rose from 20.45% to 22.09%. This was replicated across funds. Between June 1999 - September 1999, 21 out of UTI’s 28 schemes have outperformed the Sensex. UTI has become more proactive in fund management. For instance, it bought into Crest at between • Rs 200 and Rs 210 in October 1999. The stock was trading at Rs 340 in November 1999. Stocks like Visual Software, Mastek and Gujarat Ambuja have entered the top 50 equity holding list. Scrips like Thermax, Thomas Cook and Carrier Aircon are out. Complete exit from illiquid stocks such as Esab Industries. The divesture of around 83 stocks released an estimated Rs 300-500 crore of extra investible cash.Source: Business World, November 29, 1999. UTI constituted an ad-hoc Asset Management Committee with 7 members comprising 5 outside professionals and 2 senior UTI officials. The committee’s role was clearly defined and its scope covered the following areas:• To ensure that US-64 complied with the regulations and guidelines and the prudential investment norms laid down by the UTI board of trustees from time to time.• To review the scheme’s performance regularly and guide fund managers on the future course of action to be adopted.• To oversee the key issues such as product designing, marketing and investor servicing along with the recommendations to Board of Trustees.One of the most important steps taken was the initiative to make US-64 scheme NAV driven by February 2002 and to increase gradually the spread between sale and repurchase price. The gap between sale and repurchase price of US-64 was to be maintained within a SEBI specified range. UTI announced that dividend policy of US-64 would be made more realistic and it would reflect the performance of the fund in the market. US-64 was to be fully SEBI regulated scheme with appropriate amendment to the UTI Act. The real estate investments made by UTI for the US-64 portfolio were also a part of the controversy as they were against the SEBI guidelines for mutual funds. UTI had Rs 386 crore worth investments in real estate. UTI claimed that since its investments were made in real estate, it was safe and it could sell the assets whenever required. However, the value of the real estate in US-64’s portfolio had gone down considerably over the years. The real estate investments were hence revalued and later transferred to the Development Reserve Fund of the trust according to the recommendations of the Deepak Parekh committee. By December 1999, the investible funds of US-64 had increased by 60% to Rs 19,923 crore from Rs 12,433 crore in December 1998. The NAV had recovered from Rs 9.57 to Rs 16 by February 2000 after the committee recommendations were implemented.

DEAD END SCHEME?

Though UTI started announcing the dividends according to the market conditions, this was not received well by the investors. They felt that though the dividend was tax-free, it was not appealing as most of the investors were senior citizens and they did not come under the tax bracket. The statement in media by UTI chairman that trust would try to attract the corporate investors into the scheme was against the recommendation by the committee, which had adviced the trust to attract the retail investors into the

scheme. This led to doubts about UTI’s commitment towards the revival of the scheme.However, led by improving NAV figures and image-building exercises on UTI’s part, by 2000, US-64 was again termed as one of the best investment avenues by analysts and market researchers. UTI had become more proactive in fund management with its scrips rising in value, restoring the confidence of the small investor in the scheme. The National Council of Applied Economic Research (NCAER) and SEBI surveys mentioned that US-64 was once again perceived as a safe investment by the middle class income groups.However, the euphoria seemed to be short lived as in 2001, US-64 was involved in yet another scam due to its investments in the K-10 stocks . Talks of a drastically low NAV, inflated prices, increasing redemption and GoI bailouts appeared once again in the media. An Economic Times report claimed that there was a difference of over Rs 6000 crore between the NAV and the sale prices. Doubts were raised as to US-64 being an inherently weak scheme, which coupled with its mismanagement, had led to its downfall once again. This however, was yet another story.

QUESTIONS FOR DISCUSSION:

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.2. Analyse the steps taken by UTI to restore investor confidence in US-64. Comment briefly on the efficacy of these steps.3. As a market analyst, would you term US-64 a safe mode of investment? Justify your stand with reasons. 4. US-64 should have been NAV driven from the very beginning like other mutual funds. Comment.

EXHIBIT IUTI – OBJECTIVES & STRUCTURE

UTI's MandateUTI was formed to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. With war on the borders and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market. The companies found it difficult to access the equity markets, as investors did not respond adequately to new issues. To channelise savings of the community into equity markets to make them available for the companies to speed up the process of industrial growth.UTI was the idea of then Finance Minister, T.T. Krishnamachari, which would "open to any person or institution to purchase the units offered by the trust. However, this institution as we see it, is intended to cater to the needs of individual investors, and even among them as far as possible, to those Whose means are small."UTI was formed as an intermediary that would help fulfil the twin objectives of mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued to the small investors. UTI commenced its operations from July 1964 "with a view to encouraging savings and investment and participation in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities." Different provisions of the UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust.Structure of the Trust UTI represents an unique organisational without ownership capital and an independent Board of Trustees. Under the provisions of the first UTI scheme, US-64, certain institutions contributed to the Scheme's initial capital, which was redeemable at the discretion of the Trust at such value decided by the Government of India.The contributors to the initial capital of Rs. 5 crore for US-64 Scheme were Reserve Bank of India (RBI), Other Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) & its subsidiaries and other scheduled banks including a few foreign banks. In February 1976, RBI’s contribution was taken up by the Industrial Development Bank of India (IDBI). The institutions were provided representation on the Board of the Trustees of UTI. Under the provisions of the Act, Chairman of the Board was appointed by Government of India. The Board of Trustees oversees the general direction and management of the

affairs and business of UTI. The Board performs its functions based on commercial principles, keeping in mind the interest of the unit holders under various schemes. Since UTI does not have any share capital, it operates on the principle of "no profit no loss" as all income and gains net of all costs and development charges ultimately go back to investors of respective schemes. Formative Years: 1964-1974UTI commenced its operations with R.S. Bhatt at the helm. The first product, Unit Scheme 1964 (US '64), continues to be the most popular investment avenue to date. In the first year itself the scheme mobilised Rs.19 crore compared to the incremental commercial bank deposits of Rs.367 crore in that year. The first year's dividend was 6.1% compared to the bank deposit rates of 3.75 - 6%. With the increasing popularity of US-64 as a long-term investment avenue, the Trust introduced a Reinvestment Plan in 1966-67 (automatic reinvestment of income distributions to US-64 unit holders). After two successful terms, when R S Bhatt relinquished charge, he had laid a solid foundation for the Trust. During his tenure, unit capital had grown to Rs.92 crore, covering an investor base of 3.64 lakh accounts.Source: www.unittrustofindia.com

EXHIBIT IIDIVIDENDS DECLARED BY US-64Year Dividend declared1989-90 18%1991-92 25%1993-94 26%1995-96 20%1997-98 20%1999-00 13.75%1990-91 19.50%1992-93 26%1994-95 26%1996-97 20%1998-99 13.50%2000-01 10.00%