At the beginning of this year, a cleverly structured bailout allowed Unit Trust of India's open-ended Unit Scheme-64 to switch smoothly to a net asset value. So much so that even the shockingly low NAV of Rs 5.81 which was made public for the first time in nearly four decades of the scheme's existence did not cause tremors in the market.
The scheme ensured that there was no rush for redemption of units in January and the Rs 30-billion line of credit that the UTI had organised from commercial banks as a contingency arrangement would remain largely untouched.
After all, retail redemptions, even in the second half of 2001 did not exceed Rs 2 billion.
The recent rally in stock prices indicates a market perception that the UTI problem has been successfully resolved and a comfortable bull run can begin. Investors who get lulled into such complacency may, however, be in for a rude shock.
Nobody seems unduly worried about the large holding of market heavyweights that the UTI would have to steadily liquidate, not only to meet redemptions, but also to reduce the equity component of the US-64 portfolio from the current 75 per cent to just around 50 per cent.
The babus at North Block who structured the transition have simply set a time bomb and postponed the big bailout to May 31, 2003 by guaranteeing redemption of units at Rs 10.
Now that the bomb is ticking, it is anybody's guess whether a combination of economic recovery, political stability, a good monsoon and some extraordinary fund management by the new team in the UTI will all come together in May 2003 to defuse it or we will have another blow-up at that time.
Investors should also keep in mind the UTI's tendency to spring nasty surprises every few weeks because of its complete lack of transparency. The recent revelation that it has already borrowed Rs 65 billion in April-May 2001 to meet redemption demands prior to the annual book closure has been a shocker.
Did the UTI's lenders, who were obvious privy to precise information about its precarious finances, indulge in insider trading when they redeemed their units at over Rs 14 before end May 2001? Investors groups have demanded an investigation.
But whether or not the insider-trading angle is explored, the disclosure only goes towards shattering investors' faith even further.
For 38 years, UTI's growth into a giant financial institution-cum-mutual fund was based on a single factor - trust. Its units were considered as safe as government securities and that it would back off from an assured return was unthinkable. UTI was so huge that it was expected to weather all storms.
Instead, look at its record. In the last two years, several of its monthly income schemes slashed dividend to 5 per cent, the Rajalaxmi scheme aimed at the girl child was unceremoniously disbanded and investors who had held on to units for several decades were badly battered and had to make do with a tiny redemption of 3,000 units.
Unfortunately, the UTI seems blissfully unaware of the havoc it has wreaked. Its recent advertising campaign that harps on the 'trust' seems to mock investors who were not smart enough to redeem their units in May.
They had stayed with the scheme because they believed the UTI's high-profile former chairman, P S Subramanyam, when he countered all negative reports by insisting that the UTI was perfectly capable of meeting all redemption demands.
Investors who feel foolish about believing Subramanyam can console themselves by being in good company. For example: S S Tarapore, the RBI Deputy Governor, had himself failed to redeem his units in May. He says he was a passive investor.
The mother-in-law of a senior bureaucrat in the finance ministry and the editor of a financial paper that had carried several reports about UTI's looming problems had also failed to redeem their units.
Yet, Mr Tarapore, who headed the committee that investigated the UTI, insists that the figure of 1.25 million individual redemptions in May 2001 is too large to allege insider trading.
The question is what else can nastily surprise us? Many investors of US-64 also have their savings invested in its other UTI schemes. Do they believe UTI's advertising campaign and stay put? Do they invest more? Or should they worry about the fate of their other investments?
Academics and number-crunchers would correctly tell you that the UTI is not a write-off. Despite the constraints, many of its schemes have outperformed the market. But unless the government restructures and reforms the UTI, the other schemes too could end up in a big mess.
The fact that the UTI has been set up under a separate act of Parliament ensures that all its strings are pulled by powerful politicians and many of its bad investments have also been dictated by them. They ensured that US-64 remained away from regulatory supervision even after the 1999 bailout that cost Rs 33 billion to the taxpayers. In the absence of public pressure, these politicians will again ensure that the UTI is not allowed to change in a fundamental way.
Hence, the second bailout in two years was pushed through without an amendment to the UTI Act. Also, many key suggestions of the Malegam Committee have been dismissed and its demand for a complete audit and assessment of the UTI has been disregarded.
Instead, the government is trying to peddle cosmetic changes such as the four-member advisory committee that has been set up to oversee the UTI board as reform.
The committee is a terrible precedent. It creates a supervisory structure, which allows a group of individuals to enjoy powers with no statutory accountability. And such a superstructure ought not to be encouraged even though this particular group is very well regarded. What happens if and when they are replaced?
Malegam's other major recommendation or warning was regarding the UTI's 25 assured return schemes. It has pointed out that there is already a substantial gap between the value of assets under at least 16 schemes and the present value of future liability. This would imply a liability running into tens of billions of rupees, which will again have to be paid up by the government or it would lead to litigation.
Last week, Finance Minister Yashwant Sinha told BBC TV that the Malegam Committee's suggestion to bring a strategic partner into the UTI could still be considered. Considering that the government is showing no signs of punishing those who were responsible for the scandalous mismanagement at the UTI, it is only fair, that this once-monopoly mutual fund company should stop being a continuous burden to the exchequer and the tax paying citizen.
But again, only relentless public pressure can ensure such a clean up.