Sucheta Dalal :Do we really need S&P to tell us that things are bad? (23 September 2002)
Sucheta Dalal

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Do we really need S&P to tell us that things are bad? (23 September 2002)  

May be it has to do with the fact that an external affairs expert is heading the finance ministry. The government’s reaction to the serious implications of a downgrade by the Standard and Poor’s sounds much like India’s high pitched denouncement of any criticism of the Indo-Pak situation by foreigners. Unfortunately, the government’s attempt to downplay the downgrade is far more worrying than the downgrade itself. Do we really need S&P to tell us that things are going very badly for the economy?

Do we not read the daily headlines of how various ministers are fighting to derail reforms or retain their fiefs by opposing public sector disinvestment? Does anybody believe the ministers who opposed divestment will spend the next few months strengthening PSUs, giving them more autonomy, restructuring them and making them more efficient? The situation gets worse when we look at government owned financial institutions and banks. The government has earmarked Rs 20,000 crore to bail out UTI, IDBI and IFCI. And is yet to acknowledge the possibility that government run provident funds may also be stuffed with bad loans. After all, we the people have not even demanded details of their investment or publication of their portfolio. Add to this the fact that most States are bankrupt and are borrowing recklessly based on empty State guarantees. We don’t need an S&P downgrade to tell us that things are bad the evidence is available in the daily news headlines.

In fact, we would do well to disbelieve all reassurances and rebuttals that emanate from government departments. Investors of UTI, IDBI and IFCI would remember how former Finance Minister Yashwant Sinha stoutly and frequently denied any problem at these institutions or that they would seek a government bailout. Was that a Rs 20,000 crore fudge? We are being fed with falsehoods even today. We are told that the UTI bailout will cost a very precise Rs 14,561 crore as though it has been worked out to the smallest detail. Then, on September 18, U.K. Sinha, joint secretary in the finance ministry says, “we have asked UTI not to go for any distress sale of securities, including equity, and the Centre will provide assistance for any shortfall as well as for the amount which could not be realised through sale of some securities”.

And pray how will the unrealised amount be calculated unless government is providing a blank cheque for UTI’s bailout and future losses? It is possible that the bailout of UTI alone could touch Rs 20,000 crore. Can government really distinguish between routine churning of portfolios and distress sale? And doesn’t its directive amount to interference with the fund management process and hobble the mutual fund?

Let’s also look at the proposal to create UTI-2, comprising of NAV-based scheme with no assured returns. The announcements suggest the entire bunch of schemes with a corpus of Rs 17,000 odd crore will be sold to the highest bidder. In the process, government would collect approximately three per cent (or around Rs 500 odd crore) of the corpus, representing what the Asset Management Company would hope to make from a corpus of that size. The investors of UTI-2 schemes are then expected to live happily ever after, with their investments safely transferred to a well-managed scheme.

Unfortunately, there is no such fairy tale for investors. In fact, this brings to another aspect of Sebi’s mutual fund regulations. When the Mutual Fund regulations were drafted in 1996 they required that a Fund planning to sell or alter its schemes would need to call a general body meeting of unit holders and have had to seek their consent to any change in the fundamental attributes such as structure, investment pattern etc.

Under the present rules (as amended in 1999-2000), however, a mutual fund merely has to issue a newspaper advertisement and write to each unit holder about any proposed changes. If unit holders do not like the change, they would be free to exit the scheme at the prevailing NAV without any exit load. The exit option is cold comfort to investors of UTI-2 schemes in a bear market. Instead, they would do well to study the performance of various mutual funds classified by the characteristics of specific schemes. Such comparisons are available at the websites of Value Research,, or

A quick comparison would show that the bearishness in the stock market has affected most equity-based schemes, but in that depressing scenario, many schemes of the revamped UTI under its new management figure frequently among the top five performers. But the schemes categorised as laggards or ‘worst performers’ are more pertinent to investors. Investors would discover that many would-be suitors of UTI-2 are well represented in the worst performer categories. If the government sells UTI-2, to the highest bidder, investors could easily end up jumping from the frying pan into the fire with no guarantees. UTI too will lose brand value and bargaining power and also be stuck with infrastructure and staff that was meant for an organisation handling over Rs 60,000 crore of public money (which is now shrunk to about Rs 49,000 crore and will shrink even more to Rs 20,000 crore after the split). Maybe it is time for investors to wake up and look after their own interest instead of trusting the government to look after them. After all, there will be no bailouts for private sector schemes and nobody really wants to exit at current NAVs.

-- Sucheta Dalal