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BUSINESS: UTI
Trading In Trust
UTI's flagship tumbles yet again. Though the chief
culprit P.S. Subramanyam has quit, there is no knowing how long it will
take to nurse it back to health.
By V. Shankar Aiyar
It's a chronicle
of the crash foretold. When India's largest and oldest mutual fund, the
Unit Trust of India (UTI), announced the suspension of its first and biggest
scheme US-64 on July 2 much of the condemnation from the Government and
the corporate world was somewhat surprising even though the anguish of
nearly 20 million small investors in the US-64 was fully justified.
For more than a year now, the US-64, and most
schemes of the UTI, have been under a cloud. Its investment decisions,
the management's conduct and its accountability have been vigorously debated
since the stock market crashed in March this year. For the past 18 months,
the UTI was simply mirroring the actions of a coterie of bulls.
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SUBRAMANYAM'S BETRAYAL
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 After
the first debacle of US-64 in 1998, the then UTI chairman had promised
to stem the rot in an interview to INDIA TODAY. But he soon forgot
his promises:
Promise: We'll make attempts to pay 20 per cent dividend
next year and the year after that. It (US-64) is still the safest
investment.
Performance: Dividend was 13.75 per cent in 1999 and it
is 10 per cent this year. As for safety less said the better
Promise: We will invest heavily in debt.
Performance: US-64's investments in debt have dropped from
37 per cent of its corpus in 1998 to 28 per cent.
Promise: We have strategic holdings which we can sell
Performance: Not one strategic holding was put on the block.
Promise: We should have concentrated on certain specialised
sectors.
Performance: In its zeal UTI overexposed US-64 to the infotech
sector and lost heavily when the technology bubble burst in 2000. |
This was a crisis waiting to happen. Correction:
it's a crisis that has happened before. Just three years back, the Government
of India bailed out the trust with Rs 3,300 crore when US-64's reserves
turned negative. The bail-out was one of the many recommendations of the
Deepak Parekh Committee which was set up in 1998 to suggest ways to turn
around US-64. But UTI wasn't prompt in following up on the recommendations
(see chart). Neither did the Finance Ministry, which picked up the bill
of the 1998 bail-out package, deem it necessary to force the issue.
The victim-as always-is the small investor.
Like Mumbai-based J.D. Soans, 62, who had invested in US-64 for the past
10 years to fund his son's education. Now Soans "doesn't know what
to do". Radha Hattangadi, 43, had only last year raised funds for
her mother-in-law's treatment by selling some of her US-64 units. But
the six-month suspension has shocked her. "Suppose something happens
now where will I go? Can't the Government do something? Isn't the UTI
answerable?" These questions are in the mind of millions of investors
across the country.
The fact that US-64 stands on very shaky grounds
is beyond any doubt. As early as March it was known that US-64's net asset
value (NAV: a term to define the real value of a fund's investments) had
dropped and was estimated to be Rs 9.70-less than its face value of Rs
10. But UTI continued redemptions at a price of Rs 14.25 leading to further
erosion of value. Kirit Somaiya, a BJP MP and founder of the Mumbai-based
Investors' Grievances Forum, believes that this was allowed to enable
companies-who were clearly tipped off-to sell their holdings of units.
Somaiya has an interesting back of the envelope calculation: by UTI's
own admission, redemptions in just April and May were to the tune of Rs
4,151 crore at around Rs 14.25 per unit. In other words 290 crore units
were redeemed (4,151/14.25) causing a loss of over Rs 1,300 crore (14.25-9.70x290
crore units) in just two months. "This benefit to corporates needs
to be probed as it has been at the expense of the small investors,"
alleges Somaiya. While that may be true, US-64's collapse was an open
secret for a long time.
It wasn't just the small investor who would
hurt though. If the Sensex crashed by 113 points on July 3 following the
ban on redemptions it was but echoing the concern of the financial sector.
To appreciate the magnitude of this capital-market crisis ponder over
UTI's agenda for US-64: it has neither plans nor money to invest and hoped
to sell through every possible rise in the next six months. That has private
mutual fund managers worried about large-scale redemptions which could
push the stock markets into a long bear phase. As one fund manager
says, "If a quasi-gilt fund like US-64 has failed, what hope
do mere mortals have?"
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