Sucheta Dalal :Data error or worse? (7 July 2002)
Sucheta Dalal

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Data error or worse? (7 July 2002)  

UTI’s dealers were obviously learning some important lessons from the Bombay Stock Exchange (BSE) episode where president Anand Rathi’s conversation seeking sensitive market information was caught on the surveillance department’s taping mechanism.

When UTI appointed an internal inquiry to investigate the Rs 25 crore purchase of DSQ Software shares to bail out the Calcutta Stock Exchange (CSE), it was in for a surprise. UTI’s sophisticated password-operated voice recorder, which can tape over a 100 conversations at a time, failed during the crucial period January 2001 to May 2001.

According to the report, the damage to the recorder was realised only in June 2001. We learn that the voice-recorder in the dealing room was supposed to have been under the custody of the internal auditor.

However, in UTI, the cassettes were in the custody of the dealing department itself. Every dealer had the password to the recording system and any of them could play back and listen to the recordings on their own whenever required. This only reflects the scandalous functioning of UTI before the collapse.

After all, it is common sense that dealers should not have access to a recording system that is meant to monitor their conversations and dealings. At the least, it should have been in the custody of an internal auditor or compliance officer.

Vision Marketing, the vendor of the voice recording system apparently told A. N. Sridhar of UTI that ‘some environmental factors might have affected the cassettes’. In that case, UTI needs to change the system and get equipment that is more reliable for such a sensitive requirement. Surprisingly, the S.S.Tarapore Committee does not seem to have looked into the dealing room tapes either.

Advisors and Committees

It’s a bit like Humpty-Dumpty. All the government’s advisors and all the government’s committees that were supposed to put UTI together again, have failed to do so even after the first bailout in 1998.

Instead, the unenviable task of ensuring its survival has been left to chairman M. Damodaran along with the Board of Trustees. Funnily enough, many of those who were expected to advise UTI were connected with rival mutual funds. This gave them access to information on UTI and allowed them to proffer advice without responsibility for the performance or outcome.

Remember how the Parekh Committee had advised UTI to invest in new age sectors such as information technology and pharma companies in 1998? Damodaran seems to have decided to cut down on such specious advice.

For instance, the committee, which was to advice UTI’s board has remained a non-starter. Then there was another committee that advised UTI’s Mastershare for several years; but nobody remembers why it had been set up, since Mastershare had a separate Asset Management Committee.

UTI will now continue to struggle from one redemption deadline to another, hoping that the market will turn bullish and give it a much-needed break.

IFC to exit IL&FS?

The International Finance Corporation (IFC) Washington, which has a nine per cent stake in Infrastructure Leasing and Financial Services (IL&FS) wants to get out. As it happens, IFC had given itself an exit route through a put option on three of IL&FS’s major shareholders—HDFC, UTI and Central Bank—if IL&FS remained unlisted when IFC wanted to exit.

However, HDFC sources say that they have no plans to increase their stake, neither does UTI. And Central Bank presumably feels the same having steadily reduced its holding in IL&FS over the years. These sources also say that the ‘put’ is not for IFC’s entire holding but only about a third of it.

Interestingly, although IL&FS is not listed, its shareholding has churned continuously over the last few years. Central Bank, once a large shareholder has reduced its stake to around nine per cent. Orix Corporation of Japan is now the second largest shareholder with a 21 per cent stake and State Bank holds over 7.5 per cent.

UTI is the largest shareholder with a 27 per cent stake and also wants to exit. It has been pressuring IL&FS to go public. IL&FS on the other hand is confident that one of its three shareholders would be persuaded to buy the shares at the right price.

As for IFC, it has made too many disastrous investments in India and is apparently looking to book capital gains where it can and cut losses when possible.

-- Sucheta Dalal