Sucheta Dalal :Uncertainty Over UTI's Future (18 November 2002)
Sucheta Dalal

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Uncertainty Over UTI's Future (18 November 2002)  

On Saturday, one newspaper reported that finance minister Jaswant Singh had told the Joint Parliamentary Committee (JPC) that it would take five years to privatise Unit Trust of India II (UTI-II). The finance minister’s statement, if true, suggests that many details about the UTI restructuring package continue to be hidden from the people even after the ordinance was promulgated. Or, that the government is making up the restructuring plans as it goes along.

The first question that the FM’s statement raises is, why five years? And if that period has been formally decided, why wasn’t it part of the public announcement? More pertinently, if the government is indeed committed to a five-year timeframe, then it has learnt nothing from the Deepak Parekh committee’s blunder in giving UTI three years in which to make the Unit-64 a Net Asset Value (NAV) based scheme. That fixed timeframe allowed UTI’s discredited former chairman PS Subramanyam to stubbornly refuse to convert US-64 into an NAV based scheme, even when the unprecedented worldwide bull run triggered by the dotcom bubble offered a unique opportunity to disclose its NAV.

Correspondence between the finance ministry and UTI submitted to the JPC clearly establishes this. Doesn’t it make more sense for the government to privatise UTI-II whenever it gets the best possible price, rather than fix the time?

Secondly, five years is far too long. In just five years after UTI first began to dip into its reserves (1995-96) to pay dividends it has had to be bailed out thrice. The bill was a whopping Rs 18,000 crore. It is also well established that constant political interference in UTI’s appointments and those phone calls from Delhi to dictate investment decisions have destroyed the mammoth mutual fund.

Yet, the finance minister proposes that UTI-II will remain in the clutches of government (read unscrupulous politicians) for five more years. What is the guarantee that politicians will stay away from UTI and let it function autonomously until it is privatised? After all, political collusion only increased after 1998; it did not diminish. Even if we do not anticipate such disaster, let us look at the proposed structure of UTI-II.

According to the finance ministry, Life Insurance Corporation, Bank of Baroda, State Bank of India and Punjab National Bank will each hold 25 per cent of the UTI-II equity. This will not make UTI-II Securities and Exchange Board of India (Sebi) compliant. One had assumed that if government found a strategic buyer for UTI-II immediately and divested 40 per cent of the capital, then the new investor would become the sponsor and the structure would become Sebi compliant. This would also give the government an opportunity to recover some money used to bail out UTI-I.

If none of this is on the cards for five years, then the massive UTI-II with its Rs 18,000 crore corpus will continue to remain outside Sebi’s prescribed structure. UTI-I, which is being wound down, will also not be Sebi compliant. This means that even after the repeal of the UTI Act, neither entity carved out of the trust will be playing by Sebi rules. That simply cannot be permitted.

UTI’s new schemes are also a cause for confusion. UTI’s regular income scheme, which was launched after an 18-month gap, has mobilised a surprising Rs 250 crore. Also, in the first four months of this year (July-October, 2002), it collected Rs 2,700 crore of fresh investment. Does this mean that the public still trusts UTI and its fund management or that a sarkari scheme is considered safer than a private one even today? If it is the latter, then the government will do well to privatise UTI-II swiftly, otherwise the same vested interests that killed the disinvestment process will stall the privatisation and sale of UTI-II within five years.

It is bad practice for the finance minister to postpone such an important decision and leave it to his successor. The same lack of transparency also applies to the fate of UTI’s employees. In a communication to this newspaper, finance secretary S Narayan said that UTI’s entire staff will go to UTI-II, and UTI-I (which has a corpus of Rs 24,000 crore), which is being disbanded will draw such staff that it needs for its operations. But UTI’s corpus is down from its peak of Rs 72,000 crore to just Rs 47,000 crore and a voluntary retirement scheme is clearly on the cards. But the government is saying nothing about it.

In the last few days, UTI employees have been wearing black bands and holding protests against the proposed privatisation. However, is difficult to sympathise with 2,500 employees who protest only when their own jobs are threatened. Over the years, not a single UTI employee has ever spoken out against its bad investment decisions to the press neither openly not privately. Secure in their protected government jobs, they were unconcerned that the consequences of dubious investments would be borne by many middle class individuals like themselves (after all corporate investors dumped their holdings in May 2001 before UTI collapsed again).

Their list of demands doesn’t so much as spare a thought or a word of sympathy for all those hapless pensioners and widows who have depended on UTI to see them through their old age. Or the trusts, charities and libraries that find their operations severely handicapped because large chunks of their corpus was invested in the “safe” UTI schemes. They vaguely agree that persons responsible for the mismanagement at UTI should be punished, but they can be punished only if the employees help to nail the culprits. Ironically enough, the same employees who didn’t say a word when UTI was run to the ground have made a series of allegations against the present chairman who was trying to clean up the mess.

Instead, their list of demands includes job protection for the employees through the following steps: that government should scrap the ordinance splitting UTI and hand over the “Rs 15,000 crore” to be utilised by UTI right now so that it will automatically prop up the market and bring back the UTI to its past glory. If this is the employees understanding of the capital market, it is a wonder that UTI did not collapse even faster.

Clearly, the future of UTI calls for an open discussion and the government’s disclosures about its plans leave much to be desired. The question is, will any of this be raised in Parliament, which is the correct forum for such a debate, or will opposition parties block proceedings again through mindless protests and walkouts?

-- Sucheta Dalal