Top SEBI officials said that legally they do not have any regulatory authority over UTI as the Trust has been created under a separate Act of Parliament. The UTI Chairman P S Subramanyam has, however, written a letter to SEBI regarding US-64.

Subramanyam's letter follows the recent controversy kicked up by the disclosure that the US-64 scheme had a negative reserves position of over Rs 1,000 crore as on June 30, 1998, due to a depreciation in its equity investments.

"The UTI has assured us that everything is under control and we have left it to them to deal with the matter." SEBI sources said. "However, there has been an informal understanding that UTI will submit its post-1994 schemes for SEBI approval and that is what is being followed in this case", sources said.

Subramanyam has alsotold Mehta that the Trust has not dipped into the DRF for income distribution or adjusted it against depreciation in the US-64 portfolio.

"The figure of Rs 1,098 crore of negative balance in the reserve account is an accounting entry. It is so especially in the sense that it partly represents the unrealised (notional) depreciation in the value of investments as has been explained", Subramanyam told the SEBI chief.

Meanwhile, Subramanyam has written to the Finance Minister, Yashwant Sinha, that a major part of US-64 portfolio depreciation was caused by investments in PSU stocks like ONGC, Indian Oil Corporation, State Bank of India, Bharat Earth Movers, Shipping Corporation, IDBI and Sail.

These companies, along with other blue-chips, represent long-term and strategic investments and hence it would not be right to declare the net asset value under the scheme.

The UTI chief has assured the finance minister that the development reserve fund, which has been created in the books of UTI, has not beentouched for income distribution under US-64. The DRF continues to be a sort of safety net for the Trust's assured income schemes, he has pointed out. The current corpus of the DRF is about Rs 800 crore, said UTI sources.

Explaining the rationale for distributing hefty dividends to US-64 investors on June 29, Subramanyam told the finance minister that the income distribution of 20 per cent amounted to Rs 3,125 crore and this was fully covered by the availability of net income of Rs 3,222 crore earned during the year.

Mutual funds are permitted to make income distribution from the net income earned while depreciation in the value of investments is debited to the reserves directly. This accounting policy has the approval of the board of trustees and UTI's statutory auditors.