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COVER STORY: UTI CRISIS
Politics Of Trust
The show of sympathy for investors notwithstanding,
political parties use and abuse India's largest mutual fund
By Rohit Saran and V. Shankar Aiyar
The resignation
offer of a prime minister and a motion against the Government. The political
pelf extracted from the collapse of Unit Trust of India's US-64 in the
past week would probably equal the wealth lost by the investors in India's
premier mutual fund. Fixing responsibility in the government is a frustrating
exercise even in less troubled times. Therefore, it was no more than amusement
with which the country watched days of debate in Parliament with political
parties in the Opposition and those in the Government blaming each other
for the devastation of public trust in the UTI.
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HERE I COME: Sinha says he will stem the rot
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For both sides, it was a case of the pot calling
the kettle black. While the Opposition called for Finance Minister Yashwant
Sinha's head without a shred of proof of his actual role in the UTI's
mess, the Government was determined to divert the debate by tracing the
roots of the mutual fund's current state of affairs to the deeds done
in early and mid-1990s. The Government explanation rested on three major
points:
One, the US-64 bet too much on equity shares
when it should have largely invested in more stable debt. And the UTI's
fascination for equity actually started in 1994 when the Congress was
in power. Two, in the mid-1990s the UTI was compelled to invest heavily
in shares of public-sector units, whose values depreciated sharply (see
box). And finally, in recent times the UTI management has not just kept
the Government in the dark but actually misled the Finance Ministry.
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Finance Ministers On UTI:
United Trust
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"UTI is an autonomous organisation and it
is governed by the UTI Act, regulations and SEBI guidelines."
Manmohan Singh, August 8, 1995, Rajya Sabha
"Financial institutions manage their portfolio
based on their commercial perception and internal norms."
P. Chidambaram, November 26, 1996, Rajya Sabha
"As the minister in charge of UTI, I will
not accuse UTI of deliberately making wrong investments."
Yashwant Sinha, August 1, 2001, Rajya Sabha
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Without actually naming the company, both Sinha
and Minister for Law and Company Affairs Arun Jaitley held UTI's investment
in Reliance Industries Limited (RIL) as one of the reasons for the trust
being in trouble. Referring to RIL as "a certain Mumbai-based company",
Sinha stopped short of questioning UTI's Rs 1,073 crore investment-its
largest ever investment in one company-in RIL debentures and equity shares
in 1994.
He belaboured the point on August 1 when he
told Parliament, "It was not a market deal. It was a negotiated deal.
It was an off-the-market deal. It was a private placement. And it had
a five-year lock-in period. A five-year lock-in period means UTI will
not trade in shares, will not dispose of these shares for five long years.
This was the deal." But to avoid ruffling feathers, he added, "I
am absolutely certain that this investment decision was taken by the UTI
Board and the (then) Finance Ministry did not have anything to do with
it."
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Deeds and Misdeeds
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THE BLACK HOLE: Between 1994 and 1995, UTI invested in 285
companies that no longer exist. The loss: a neat Rs 386 crore.
PSU PINCH: Between 1991 and 1996 UTI invested Rs 6,222
crore in shares of PSUs. The US-64 scheme alone had put in Rs 4,722
crore in PSU shares. The market value of these investments has halved.
Sinha thinks such large investments are a "subject matter of
inquiry".
FEEDING ON THE FUTURE: Dividends should always be paid
out of earnings. But UTI often flouted this norm. For three years
between 1994-97, it took Rs 2,221 crore out of its reserves just
to maintain a high dividend of 20-26 per cent. This way the UTI
created an artificial perception of its financial health. The consequence:
on June 30, 1998, UTI's reserves dipped to - Rs 1,098 crore.
INSIDER TRADING: What was behind the redemption rush in
May 2001? Units worth Rs 3,682 crore were redeemed during the month,
compared to redemptions of just Rs 473 crore in April 2001. The
allegation that private companies sold their units is untrue. Units
worth Rs 1,557 crore were redeemed by individuals and Rs 960.73
crore by banks. Corporate withdrawal was only Rs 1,033 crore.
RIL AGAIN: UTI's largest ever investment in one company
was in Reliance Industries (RIL). In 1994 it invested Rs 1,073 crore
in RIL through a "negotiated off-the-market deal" at Rs
385 a share. The value tumbled to a low of Rs 77.50 in January 1996,
before recovering.
A PAT ON THE BACK TOO: UTI has done badly no doubt, but
has outshone most other mutual funds. The annual fall in the net
asset value (NAV) of most equity-based mutual fund schemes on June
27, 2001, was in the range of -76 per cent to -38 per cent. UTI's
worst performer was Master Plus 1991 with a -24 per cent drop in
its NAV.
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In saying so, Sinha was also shielding himself.
His defence: just as Manmohan Singh did not know what mischief the UTI
was up to in 1994, he did not know of the trust's misadventures in the
market in 1999 and 2000. Kirit Somaiya, a BJP member of the Lok Sabha
who has been crusading against UTI's mismanagement for at least six months,
reminded the House that it was Singh who had defended the fall in the
investment values of UTI in Parliament in 1995 by claiming "it is
inherent in the nature of equity markets that prices fall and rise. Simply
because on a day one particular share price goes down, you cannot conclude
that the decision to invest in that particular share was faulty."
That was very close to Sinha's own defence for the fall in values-and
therefore the return-on some investment schemes of UTI.
Where Sinha, however, could find himself defenceless
are in his acts of omission. What did he do to stem the rot in UTI which
he knew had set in since the early and the mid-1990s? Why weren't the
Deepak Parekh Committee's recommendations, like bringing US-64 under the
regulation of the Securities and Exchange Board of India (SEBI) and making
the scheme NAV-based (a system under which a scheme's market value, or
net asset value, is declared to the investor), implemented? Purely to
score political points, the Government lobbed the same argument back to
the Congress and asked why it sat over the suggestion of the Joint Parliamentary
Committee in 1993 to bring UTI under the purview of the SEBI.
But there is a big difference between UTI's
recent fiasco and those in the mid- and early 1990s. Never has the trust
invested so heavily and foolishly in unlisted companies as it did in the
past two years. Asks Congress' Jairam Ramesh: "One big difference
in UTI's present crisis is that it is also perpetuated by investment in
unlisted companies, many of them with a dubious track record. The fall
in such investments can't be blamed on market fluctuation. It's sheer
incompetence."
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