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BUSINESS: UTI CRISIS
Is Reliance The Red Herring
After Cyberspace and Ketan Parekh stocks, it is
now UTI's largest single investment in Reliance Industries Limited (RIL)
that is under scrutiny. The Ministry of Finance, SEBI, Department of Company
Affairs and the CBI have already investigated the seven-year-old investment.
Yet questions on its merit abound. INDIA TODAY presents a primer on this
never-dying controversy and other big investments of UTI.
By V. Shankar Aiyar
Q. Did UTI pay a high price
for the Reliance shares and over-invest in the company?
It was UTI's largest
ever single investment but it followed pricing norms of the day. Swadeshi
Jagran Manch Convener S. Gurumurthy claims that UTI paid Rs 385 for each
RIL share while Reliance promoters Ambanis allotted shares to themselves
at Rs 61. Reliance confirms that warrants (convertible into shares) were
issued to the promoters but claims that these were priced at Rs 150 each,
payable within six years of allotment. This was done through a resolution
passed at the company's annual general meeting (AGM) on December 12, 1992
when the RIL share price was Rs 242. In the 20 months between December
1992 and October 1994 (when UTI bought RIL shares at Rs 385), RIL share
prices had risen consistently and the company had issued foreign currency
convertible bonds at Rs 288 per share and a global depository receipt
issue at Rs 369 a share.
According to SEBI guidelines of August 4, 1994,
the minimum price of an RIL share in October 1994 on preferential allotment
worked out to Rs 377. The market price of the share that month was in
the range of Rs 410 to Rs 450 and the price of Rs 385 a share which UTI
paid was a discount of 6 per cent on the market price.
The share warrants issued to the Ambanis in December
1992 were actually allotted to them in 1994. According to the AGM resolution
the Ambanis paid Rs 150 for those warrants at the end of six years, in
2000. Gurumurthy's claim is that the Rs 150 paid in 2000 for a transaction
settled in 1992 actually amounts to paying just Rs 61 a share at current
value. Reliance dubs this argument as misconceived. The October 1994 investment
of UTI in RIL shares totalled Rs 773 crore. Six months before that UTI
also invested Rs 300 crore in non-convertible debentures of RIL at Rs
337. In all, UTI invested Rs 1,073 crore in one company in less than a
year.
Q. Why did UTI buy RIL shares
through private placement and not from the market?
Because open market purchase would have made
the acquisition costlier. UTI had launched around half-a-dozen new schemes
in 1993 and 1994. Thanks to the post-Harshad Mehta scare, these schemes
drew investors in droves and collected over Rs 1,200 crore through tax-planning
and retirement schemes. Obviously, these funds had to be invested.
If UTI had used the market route it would have
triggered a spiral in prices, given the fact that it is the biggest player
and because of the volume and value involved. Private placement not only
offers price stability for the purchase decision, but also enables the
fund to negotiate a discount as against the step-up premium it would trigger
through open market operations.
Apart from RIL, UTI bought shares of eight other
companies through private placements in 1994. Returns on most of these
investments, other than in HDFC, have been negative. All private placements
done after August 1994 had lock-in periods.
Q. Did the investment in Reliance
shares turn US-64 scheme into an equity fund?
Yes, it
certainly did. Given the size and the value of UTI's investment in RIL,
it was but natural that the proportion of equity in US-64 rose from 39
per cent in 1993-94 to 50 per cent in 1994-95. But both the UTI and RIL
stress that the two-phase Rs 1,073 crore investment in RIL in 1994 was
less than 2 per cent of the total corpus of UTI, even though it accounted
for a much higher share of US-64 corpus. What did happen though was that
in 1994-95 the Indian stock market saw a flurry of new issues raising
a total of Rs 34,700 crore as nearly 1,200 new companies were listed on
the Bombay Stock Exchange.
Triggered by the boom in public issues, UTI
clearly was drawn in by the euphoria on equity. Secondly the government-in
its first essay at disinvestment-managed to lump public-sector unit stocks
worth over Rs 6,200 crore onto UTI's books. The sudden inflow of equity
saw US-64's equity component rise from 26 per cent to 67 per cent.
It is being argued that if UTI had invested
the Rs 1,073 crore in debt and not in the RIL shares in 1994, its value
would have doubled by now. The seven-year return on RIL shares is only
92 per cent. But it is also true that at the end of the five-year lock
in period, UTI's return on investments in RIL was 243 per cent. Theoretically,
UTI could have sold off all or a large part of its RIL holdings and made
a killing. It is another matter though that stock markets could have gone
into a tailspin with such large-scale offloading of shares. Between 1998
and 2001, the ratio of equity in US-64 rose from 68 to 70 per cent despite
the Deepak Parekh Committee recommendation to reduce equity exposure.
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