Sucheta Dalal :UTI gets another dole without stricter accountability?
Sucheta Dalal

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UTI gets another dole without stricter accountability?  

December 24, 2001

There are just a few days left to the Unit Trust of India's January deadline when the sale and repurchase price of its Unit Scheme-64 has to be linked its net asset value.

After UTI's second collapse this July -- its second in two years -- it had shutdown the sale-repurchase window for units and bought time until December 2001 to figure out how to deal with the situation. Under pressure from small investors, it later offered a partial bailout by redeeming up to 3,000 units per individual at par (Rs10) although the NAV was under Rs 8.

Now that its decision time, is UTI prepared to for drastic reform? Not a chance. Not only is UTI showing no inclination to change, but also it seems to have the covert backing of government in maintaining status quo.

Lets look at how it works. The July collapse indeed caused national outrage but investors were not clamouring for reform - they only wanted a bailout. The investor wants his money, and the uninvolved citizen fails to understand that government will only pick his pocket to pay unit-holders. The 1999 dole of Rs 33 billion was sweetened with tax exemptions for all investors and mutual funds, but it came from taxpayers' money.

Having dealt with many financial scams in the last 10 years, government has perfected its response to public rage. When the outrage is at its peak, the government immediately sets up a committee to investigate the fraud.

This is followed by a reference to the Central Bureau of Investigation, some high profile arrests, plenty of photo opportunities for the media in order to show that even the mighty can be humbled and that is it. It then waits for things to cool down. As for the committee reports, they can either be persuaded to be waffle, or if they contain sensible suggestions the implementation is delayed until the scam fades from public memory.

The drama was played out in July. Former UTI chairman P S Subramanyam and his senior colleagues were arrested for a Rs 320 million investment in Cyberspace Infosys. Since UTI had collapsed for the second time in two years, it probably deserved two committees -- the Malegam Committee to look into the future and suggest how to restructure UTI and the legislative changes required to make it more competitive in future; and the Tarapore Committee to look at what went wrong and identify precise areas of failure.

Both reports have been submitted in the last few weeks.

The Malegam committee's (whose report is available on UTI's Web site) recommended a single asset management company to control all of UTI's 73 domestic schemes. It asked for all the schemes to be valued and pointed out that several of its 25 assured return schemes also had a shortfall between the NAV and return assured to investors. Most importantly, it suggested a way to get UTI out of the clutches of government by inducting a strategic partner who would hold a 60 per cent stake in the AMC.

Naturally such a drastic change was unacceptable to the establishment, and after some strategic leaks and plants in the media, the UTI board of Trustees met last week to reject the Malegam panel recommendations.

Soon after that the Tarapore Committee submitted its report. Although it specifically requested the government to make the full report public in its entirety, it was sent out to the Joint Parliamentary Committee and has appeared in the public domain in the form of sensational leaks.

The Tarapore report once again confirmed that UTI's problems were largely due to shady and doubtful investments, bailout of chronic industrial defaulters such as the Essar group and others and investment in a variety of volatile software scrips and stocks pushed by stockbroker Ketan Parekh.

The Tarapore panel, which comprised a former CBI chief, top central banker and a nationalised bank chairman -- asked that its findings be sent to pre-investigative body for further inquiry. S S Tarapore (a former Deputy Governor of the Reserve Bank of India) who headed the committee has argued in an interview to the Financial Express that it was not "suitably empowered" and had to "rely on documents placed before it by the UTI" and was also unable to questions the regulators and the counter parties to several transactions with UTI.

This was just the handle that government needed. Despite the fact that the committee's findings warranted an immediate reference to the CBI the government merely passed the report on to the JPC which nowhere near completing its hearings or finalising its report.

Also, the JPC, which is investigating the collapse in stock prices, is showing all signs of winding up its inquiry by finding a couple of scapegoats.

Where does that leave UTI? At status quo. There is a new chairman, but no amendment to the UTI Act to bring it under regulatory supervision. There are some internal changes in organisational structure and reporting responsibilities, but no statutory changes to make fund managers more accountable.

Yet, the government is all set to go ahead with another massive bailout package comprising an extension of the Rs 30 billion line of credit to UTI from commercial banks; a large cash bailout to bridge the difference between NAV and the payout to small investors and a further bailout through liquidity bonds to cover a run on units if any.

This bailout may or may not cover the shortfall in a many of the 25 assured return schemes of UTI but who is asking for such details?

What is most amazing is that the government, which did nothing to prevent the abuse of UTI's investment portfolio over the last three years describes the bailout as "arriving at a balance between the cost to the exchequer and the cost to the investors" (Business Standard, December 24, quoting anonymous senior finance ministry officials).

Let us not forget that UTI's investors are a tiny and affluent segment of the Indian population.

The cost to them cannot be at the cost to the general population. Look at the numbers. The government has already doled out Rs 33 billion to UTI in 1999 and will probably give it another Rs 20 billion in 2002 (for all schemes). This money would have funded the entire 120-kilometre, two-lane Skybus Metro project for Mumbai city -- providing clean, fast and air-conditioned transport to 6 million daily commuters in Mumbai.

If calculated in terms of healthcare, education, poverty alleviation programmes, the money diverted away from benefits to a large swathe of the population would be humongous.

Yet, the government will, in all probability, get away with the massive bailout without so much as a protest. That is because social activists in India and NGOs have yet to understand the enormity of the leakage of scarce resources to privileged investors and industrialists through organisations such as the UTI and development financial institutions.

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-- Sucheta Dalal