The never-ending saga of UTI bailouts (8 July 2001)
After I wrote about UTI’s problems in May this year — the shortfall in its corpus, its bailout of companies close to Ketan Parekh and brokers of the Calcutta Stock Exchange — a worried finance chief from a small town sugar cooperative in Maharashtra called up to ask if he should withdraw his firm’s investment in the US 64. After some loud thinking and fact finding, he concluded the government would never let UTI down, and bail it out again if the need arose.
I could not disagree. After all, in 1999, the government had made a fool out of prudent investors who had redeemed their units before the book closure in anticipation of US 64’s problems. Its massive funds-infusion, further topped up with tax exemptions for the mutual fund industry, only reinforced the belief of people like the sugar co-operative investor, that they had nothing to worry about. Not once did the government attempt to put in place a time-bound restructuring programme, or fix accountability on the part of fund managers.
Why should an investor be blamed for expecting the same this time? It has been suggested by some writers that UTI should have simply declared no dividend and said — sorry guys, welcome to the real world; and restarted the sale of units in July at Net Asset Value-based pricing. That would indeed have been the perfect solution if government had prepared the ground for such action over the last two years. It did nothing of that sort. Instead 1999 bailout only laid the grounds for the present crisis.
On May 16, 1999, in an article titled ‘Is UTI heading for another bail-out?’ this column had written that ‘US 64 is still in deep trouble, has little maneuverability to restructure its portfolio and could need another bailout if the repurchase price for units in not brought in line with Net Asset Value’. A big blunder in the Deepak Parekh report was that it recommended a huge bailout but failed to force UTI to go NAV based in 1999. A mistake that was obvious even then.
The Parekh committee had estimated UTI’s NAV at Rs 9.47 and in July UTI resumed the sale of units at over Rs 13 each — so, UTI was losing over Rs 3 per unitit sold; this would have to be paid out of the profits of its existing unit holders. In effect, when P.S.Subramanyam took charge at UTI, he knew US 64 would not only have to beat the market, it would also have to cover up the loss incurred on the sale of every new unit.
Nothing in the last two years suggests such awareness. Instead, the market has been rife with rumors about its nexus with Ketan Parekh and his band of chummy corporate houses and politicians. UTI also failed to follow its own pre-bailout initiative of strategic sales of block equity to corporate houses. It continued to pile on debt of ‘questionable quality’, to which it added high-priced unlisted dotcom companies with dubious business profiles which are nearly worthless today. It even failed to amend the UTI Act and create a separate Asset Management Company for its flagship scheme, the Rs 20,000 crore US 64 as recommended by the Parekh report. Yet, UTI has had time to set up an institute for corporate governance and to hand out awards to the ‘best governed’ companies. So pampered was it, that government ignored SEBI’s dmands in 1992 that UTI should be brought under SEBI regulations.
Ten years later it is irritating to listen to the UTI board bleat about US-64’s multiple roles as a term lending institution, large property owner and mutual fund, making it difficult to estimate the real NAV. The Parekh committee report says that it took just 7 years for UTI to go from a position of very high reserves to a whopping Rs 6,600 crore shortfall in its corpus. If UTI can destroy unit holders wealth with such efficiency, will someone tell us why government is incapable of altering its structure and forcing a clean up? If government has been a silent spectator for over a decade, it is only because UTI was a convenient vehicle to accommodate friendly industrialists and financiers.
If the government is serious about an investigating UTI it has to examine the role of politicians who influenced UTI’s decisions. But there is little chance of that happening. One indicator is the thundering silence of the Joint Parliamentary Committee (JPC) even after such a massive debacle. It may be recalled that JPC Chairman Lt.Gen. Mani Tripathi had first said that UTI would not be examined by the JPC; he later clarified that only certain scam-related transactions would be looked into — but that is clearly inadequate, andit is obvious UTI’s very structure needs to amended drastically and quickly.
The multi-party JPC is obviously the best forum to examine this and make suitable recommendations. In fact, if the JPC is really concerned about public interest and about investor confidence, it should bring out an interim report on UTI alone, and demand that the changes recommended by it be implemented in the next session of parliament. There are at least three different reports on UTI which suggest how UTI can be restructured. These can easily provide the basis for the JPC’s deliberations. But so far, UTI is not even on the JPC’s current agenda. The 30-member committee is scheduled to land up in Mumbai on Monday to meet with various institutions, but UTI is not on the list.