UTI Mutual Fund (UTIMF) caused a lot of anger when it terminated the Senior Citizens Unit Plan (SCUP) in 2008, just 15 years after it was launched. The scheme was sold with the slogan –“Makes your old age worry free, once and for all”, so its unilateral termination caused both shock and anger. But UTIMF, and the Government of India, got away lightly. It had expected to face lawsuits from ordinary investors, but nothing of that sort happened because a long-drawn legal battle is hardly an option for small investors in the absence of strong investor associations that can doggedly litigate these issues on their behalf.
While writing about the termination of SCUP in 2008, I too had said that investors are unlikely to succeed in litigation unless they are able to establish deliberate mismanagement and under-performance. However, Vijay Trimbak Gokhale, an activist, has used the Right to Information Act (RTI) with great effect to dig out important details that may actually allow investors to successfully reopen the possibility of litigation.
SCUP was launched in 1993 promising ‘sunshine’ in the autumn years of investors’ lives. But, in 2002, after Unit Trust of India’s second bailout, the scheme began to seem unviable. It was an assured returns scheme launched with an insurance cover offered by New India Assurance Company (NAIC), to provide long-term security to investors, based on a one-time initial payment that would take care of investors’ hospitalisation expenses after a certain age. When UTI was split in 2002, all mutual fund schemes were transferred to UTIMF while those with long-term obligations and other investments and properties went to the Special Undertaking of UTI (SUUTI). SCUP, which has long-duration obligations that could go up to the year 2040 ought to have gone to SUUTI, but was wrongly retained with UTIMF.
Vijay Gokhale’s RTI queries reveal that UTIMF wrote to the government to transfer the scheme to SUUTI but was turned down because it expected to wind up the Special Undertaking when all its liabilities were settled. However, far from winding up SUUTI, there is a plan to give it a new lease of life mainly so that it can act as a custodian for block holdings of three private firms – Larsen & Toubro, ITC and Axis Bank.
Information gathered by Mr Gokhale shows that UTIMF first wrote to the finance ministry in June 2005 asking for SCUP to be transferred to SUUTI. It wrote to UK Sinha, its present chairman, who was then a joint secretary with the government. The letter said that since SCUP was an assured returns plan of sorts, it was in violation of the Securities and Exchange Board of India’s (SEBI) regulations. It also said that the scheme was unsustainable and the net worth of UTIMF’s asset management company was inadequate to guarantee any liability arising on account of SCUP obligations.
The government refused to accept responsibility for SCUP and asked UTI to approach NAIC and work out a mutually beneficial solution. NAIC refused to accept responsibility saying that the insurance regulator did not permit it to accept long-term obligations or even advance premium payments. UTIMF originally planned to terminate SCUP in November 2004 but worried that it would trigger negative publicity and litigation. It again planned to terminate the scheme in August 2005 but developed cold feet. The issue was revived when UK Sinha moved to UTIMF; he wrote to his successor Dr KP Krishnan, in the finance ministry and obtained a go-ahead of sorts on 23 July 2007. The ministry wrote, “The procedure adopted while terminating the Rajlakshmi Unit Scheme 1992 in October 2000 may be followed in the case of SCUP. The decision has to be taken by NIAC board/UTI AMC (Board/trustee). When the matter is brought to the board, the legal opinion may be taken into account by the board. UTI AMC and NIAC may also prepare themselves adequately to defend the decision if challenged.” Further, the government director on the NAIC board was directed to support the termination.
Here is where Vijay Gokhale’s findings get interesting. He learns that UTIMF had sought two legal opinions from Justice Sujata Manohar, former judge of the Supreme Court of India. The honourable judge had clearly opined that the termination “must be such that these cannot be construed as arbitrary, unreasonable or unfair.” She also said, “In my view, more financial details need to be given to show the manner in which the scheme has now become unworkable in order to justify the decision to terminate the scheme.” Since the termination was never challenged in court, UTIMF was never forced to provide any financial details to show that the scheme was, indeed, unworkable. Consequently, nobody knows if the liability that would devolve on UTIMF, NAIC or the government was so large that terminating the scheme was the only option.
Mr Gokhale’s RTI query also threw up some disturbing information. He learns that some 39,000 people had not redeemed their units as until the end of 2008, while the number of people availing of the medical facility under the scheme was 14,892 until October 2008. He further says that UTIMF has absolutely refused to part with information about those who have not redeemed their units (probably because it fears that they may get together to file a suit). Mr Gokhale knocked on SEBI’s door for information, but that too was turned down. Interestingly, while UTIMF claimed that it was terminating SCUP because it was not in compliance with SEBI’s regulations, the regulator says that it has no information about having issued any such letter/advice to the mutual fund.
Clearly, litigation based on Vijay Gokhale’s findings could force UTI to justify how and why SCUP was considered unviable because it is in line with the legal opinion it has obtained from Justice Sujata Manohar. Also, in a situation where the Congress-led government has spent several thousand crore rupees on employment guarantee schemes, the courts may have looked at the numbers and asked the government and UTIMF to deliver on its promise of ‘Sunshine in Autumn’. Investors who want to pursue the issue can contact Vijay Trimbak Gokhale at [email protected] or 9819287584.