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BUSINESS: UTI
Resignation Not Enough
The person largely
accountable for the rot in the system-UTI chairman P.S. Subramanyam-got
off rather lightly by resigning a day after the fiasco. In less than three
years he was at the helm, Subramanyam not only did nothing to cleanse
the stables, he pushed UTI further into a mess. The proportion of technology
stocks in UTI jumped from less than 2 per cent to 21 per cent, before
inching back to 7.41 per cent. Even though the Deepak Parekh Committee
suggested that UTI should shift the focus of US-64 from equity to debt,
Subramanyam actually hiked the weightage of equity using falling interest
rates and the technology boom as a convenient excuse. Worse, the choice
of equity was highly questionable.
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"How
will I fund my son's education?"
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SHATTERED DREAMS: J.D. Soans (centre) had
been investing in US-64 for the past 10 years, hoping that it
would help fund his son's education. But the drop in the value
of the units has upset his plans. "I don't know what will
happen to my savings," he laments.
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Consider the decision to invest in Cyberspace.
Despite advice from UTI's research team and the fact that its own arm
UTI Securities had pulled out of the issue, the trust went ahead and invested
Rs 34 crore at Rs 930 per share in a company that had changed its name
twice in 10 years. Today, the investment can only be written off.
Similarly, UTI also invested in scrips like Himachal
Futuristic Communications Ltd and Zee Telefilms at a time when other funds
were getting out of them. Indeed, it is now suspected that UTI had been
involved in bailing out bull operator Ketan Parekh. Such has been the
profligacy of fund managers that US-64's reserves have come down from
Rs 3,491 crore to negative in less than 12 months. Not surprisingly, Somaiya
believes that Subramanyam is largely responsible for the rot that has
set in the UTI.
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"All
I am left with are certificates."
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| PAPER
CHASE: Middle-aged Satish Kulkarni (right) is one of the 20 million
small investors in the US-64 scheme who found themselves left in the
lurch on July 2 when UTI announced its decision to suspend the redemption
and repurchase of units for six months |
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UTI's board is no less responsible for being
a willing party to the dubious decisions of its chairman. Points out Dhirendra
Kumar, director of the Delhi-based Value Research: "It's not Subramanyam's
fault alone. The whole UTI hierarchy thinks that investing in equity is
the way out. That's clear from their response when they blame the stock
market for the fall in US-64 valuation. But didn't they know that an income
fund like US-64 should not have invested 72 per cent of its funds in equity?"
The Finance Ministry's first reaction that it
wasn't consulted by the UTI before announcing the six-month suspension
worsened the crisis. The claims aren't backed by facts. A senior official
in UTI reveals the Finance Ministry knew as early as May that the fund
was sitting on a time bomb. "Our request for a bail-out (of around
Rs 6,000 crore) was pending before the ministry since June 13. We were
told there was no bail-out and were asked to 'bite our own bullet'."
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DHIRENDRA
KUMAR
Director, Value Research |
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What are your savings worth now?
Unlike other mutual funds, the true value of investments made
in US-64 has always been kept under wraps. Our calculations suggest
that the real value of a US-64 unit of par value Rs 10-called the
net asset value (NAV)-may only be Rs 9.74.
Here's a primer on how the NAV of US-64 moved in
the past one year. Spurred by the bullish stock market in 1999-2000,
UTI hiked the dividend from 13.5 per cent to 13.75 per cent in June
2000. Since NAV is assumed to be the average of the sale (Rs 13.50)
and repurchase (Rs 13.30) price of July 2000 we get a NAV of Rs
13.40 for June 2000.
There is another method to calculate the NAV. As
on June 30, 2000, the value of US-64's investments was Rs 20,593.63
crore. With a unit capital of Rs 15,146.26 crore, there were 1,514.626
crore units outstanding. Thus NAV per unit comes to Rs 13.50, very
close to the Rs 13.40 calculated earlier.
Now let's look at US-64's assets. As on June 30,
2000, its debt-equity ratio was 28:72, or Rs 3.72 in debt and Rs
9.68 in equities. When the stock market turned bearish in 2001 the
value of equity per unit came down to about Rs 7.07. Assuming a
12 per cent rate of return on debt, the value of debt per unit rose
to Rs 4.17 now. This puts the NAV at Rs 11.24.
In 2001, 237 crore units were redeemed. UTI says
the net outflow was Rs 3,301 crore so the average redemption price
was Rs 13.94 per unit. As the fund was buying back units above the
real NAV (Rs 11.24 in June 2001), it further eroded the US-64 net
value by Rs 640 crore and dragged down the NAV by 50 paise to Rs
10.74. The Re 1 dividend will bring it further down to Rs 9.74.
(Based on actual unit capital, redemption and sale
value disclosed and dividend declared by UTI. Average redemption
price, depreciation and gain in value are assumed.)
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Panic stricken, the UTI management approached
banks and financial institutions for a line of credit. This again was
known to the Finance Ministry. As was the fact that corporates were pulling
out of US-64 and banks were refusing to lend against units that were once
considered as good as gilts. As late as on June 30 every material fact
and the decision to ban redemptions were conveyed to North Block.
But merely informing the Finance Ministry doesn't
absolve the UTI of its faults. After all it is an autonomous institution
with 37 years of market experience. Says Jaimini Bhagwati, joint secretary,
capital markets and external commercial borrowings in the Finance Ministry:
"The Government can't be telling UTI what to do and what not to do.
Accountability for what UTI does rests with its chairman and the management.
That is why the chairman's resignation was accepted." Bhagwati says
it was not as if the Government did nothing. "Formal and informal
suggestions have been made to the UTI management on several occasions
in the past. It is the UTI which has to act."
The request for a bail-out was also untenable.
In 1999 the Government created a special purpose vehicle called Special
Unit Scheme wherein it transferred PSU shares valued in the books at Rs
4,800 crore but worth only Rs 2,727 crore and provided the US-64 with
cash. But in retrospect it was a classic case of what is defined in banking
terminology as a moral hazard-it only emboldened UTI to take greater risks
hoping that a government rescue will be forthcoming if things go wrong.
The good news is that the Finance Ministry did
start grappling with the crisis within 24 hours. On July 4 it met with
UTI's acting Chairman K. G. Vassal and asked for a solution that would
provide liquidity to help small investors who may want to sell their units.
The bad news is that nearly eight years after the first signs of the rot
were spotted by former SEBI chairman G.V. Ramakrishna when he called for
UTI to be brought under the market regulator, there is no clear thinking
on what could be a permanent solution. US-64 continues to be the only
mutual fund scheme to remain outside the purview of the SEBI.
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