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BUSINESS: UTI
Who Killed US-64?
Former chairman Subramanyam
was a law unto himself who pauperised the flagship scheme by gambling
on high-risk shares and debentures
By V. Shankar Aiyar and Sumit Mitra
In December 1963, participating in the Parliament
discussion on the Unit Trust of India (UTI), Swatantra Party leader Minoo
R. Masani warned the Nehru administration of the pitfalls of the government
running an investment fund. "Think Sir, of the financial power of
corruption that will be implicit in such an arrangement ... The granting
of credit (or capital) will be a favour and the denial of credit will
be punishment."
If the republic were not so young then, it would
not have escaped Masani's eyes that the response to such favours, or punishments,
were likely to find their echoes in politics. The crash of US-64, the
flagship scheme of UTI, the state-owned mega-fund, happened because the
trust had allowed its funds to be hijacked in unwise but politically compelling
corporate investments. Yet when the state intervened by sacking UTI chairman
P.S. Subramanyam the administrative decision became a full-blown political
crisis, with the opposition asking for the scalp of Finance Minister Yashwant
Sinha. There were rumours that the Government had "prior knowledge"
of the six-month suspension of the scheme's sale and repurchase mechanism
ordered by Subramanyam a day before his ouster. The rumour mills even
tried to transfer the guilt from the offender to the sheriff, the finance
minister, in this case.
Congress President Sonia Gandhi was quick to
shoot off a letter to Prime Minister A.B. Vajpayee urging him to remove
Sinha. Former finance minister Manmohan Singh did not blame Sinha but
wanted him to quit anyway to pave the way for an "independent probe".
Significantly, in an interaction between BJP leaders and the Government
on economic issues, former BJP president Kushabhau Thakre grilled Sinha
on the US-64 issue and repeatedly demanded to know the "full facts".
In his first news conference after Subramanyam's
removal, Sinha did not dwell much on the "facts" as that would
have called for a detailed investigation. However, he said that the Finance
Ministry had "not only been kept in the dark on US-64, but misled"
by the UTI management. He promised an inquiry into "possible insider
trading" by companies that divested their unit holdings shortly before
the suspension. The National Association of Small Investors (NASI), which
has filed a petition challenging the suspension decision, has calculated
that between March and April this year, units worth Rs 4,141 crore were
redeemed of which corporate investment was to the tune of Rs 4,000 crore.
But that only relates to the allegation of selective
leaking of the information of US-64's collapse on the eve of its dividend
declaration. The scheme had been floundering even after a Rs 3,300-crore
bail-out in 1998, with many investments that were bold enough to make
headlines in the financial tabloids. Sinha had little authority to demand
an explanation from Subramanyam for two reasons. The government had forfeited
its right to have a nominee on the UTI board of trustees in 1997 when
P. Chidambaram headed the ministry. Besides, the circumstances of Subramanyam's
appointment in 1998 had kept him quite beyond the finance minister's reach.
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Subramanyam
was appointed as UTI chief at Jayalalitha's prodding. He reported
to the PMO directly, completely sidetracking the finance ministry.
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The former UTI chief was selected not by the
Finance Ministry but by AIADMK supremo J. Jayalalitha who, in 1998, had
made his selection a condition for her continuing to support the NDA government.
Though the support was withdrawn the very next year, Subramanyam had by
then established a strong rapport with the Prime Minister's Office (PMO)
bypassing North Block completely.
While this unorthodox line of command helped
him keep Sinha in the dark about investments, he also became the "superboss"
in the UTI because of the authoritarian rules prevalent in the trust.
The chairman exercised unbridled authority over single investments amounting
to Rs 40 crore (Rs 50 crore till early this year). According to the rules,
the trustees need to be consulted when the investment amount exceeds 5
per cent of the investible surplus. However, the cash in hand for investment
can be inflated at the chairman's will by selling some of the securities
prior to making an investment. The investment amount then drops below
the 5 per cent limit for consulting the trustees and the decision can
thus be taken single-handedly. That's how US-64 reportedly sold off much
of the Nestle and HLL stocks that it had acquired at low prices.
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