Sucheta Dalal :How to raise a stink or smell a dead rat (29 July 2002)
Sucheta Dalal

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How to raise a stink or smell a dead rat (29 July 2002)  

A few weeks ago there was a nasty stink in the Finance Minister’s office at North Block, but everybody simply ignored it until they got used to the smell. Since nobody brought it to the FM’s notice, he didn’t even feel the stink. A newspaper report tells us that when Jaswant Singh took over as FM, he had the place turned upside down until the awful stench was traced to two dead rats behind some boards that were torn down. This little story has some striking parallels to the Unit Trust of India (UTI) debacle.

Ever wonder why UTI’s reckless dealings which caused a stink not reach the FM? Well, because nobody brought it to his notice! So the FM is let off and his Finance Secretary (Ajith Kumar) is indicted in a draft report of the Joint Parliamentary Committee (JPC) investigating Scam 2000. It is alleged that Kumar treated the UTI issue very casually. The question is, was he the only one who ought to have smelt a dead rat in UTI? And has JPC obtained all the facts before drawing conclusions? Since the JPC has junked its own report and dismissed it as the ‘jottings’ of its Secretariat, we should probably disregard it too. But as everybody knows, a similar ‘draft’ report was released after Scam 1992 which was roundly thrashed and then rewritten and released as the official document. At that time, JPC members who had no interest in the hearings suddenly played a key role in the horse-trading that decided who to indict or protect. Since the discarded draft is certain to form the basis of the final report, it is pertinent to look at what it says. According to the report, ‘Ajit Kumar adopted a casual approach in dealing with the UTI crisis’ and ‘bureaucratic inertia in the Finance Ministry also contributed to the UTI mess’.

During the crucial phase from January to May 2001, the FM’s Chief Economic Advisor Dr Rakesh Mohan was on the UTI board. Did he attend its meetings? He was also a director on the capital market watchdog Sebi from January 2001 until he moved to the RBI as deputy governor. This means, that if UTI’s former chairman P. Subramanyam had kept his Board of Trustees properly briefed, the finance ministry should have been privy to information about UTI’s problems long before the second debacle.

Has the JPC even attempted to go beyond the events of June 29, 2001 when Subramanyam casually informed Joint Secretary Jaimini Bhagwati about a possible decision to freeze units? Has it asked Dr Mohan about the information provided to UTI’s board during the crucial months of March, April and May 2001 when stock prices were on a downward spiral? Did the Board of Trustees ever question UTI’s investments, which are now categorised as dubious by the JPC’s junked report?

And on whose assurance did Subramanyam permit large scale redemption of units by banks and institutions at a high Rs 14.75 all through May 2001 without alerting his board and the government to the consequences? Surely the UTI chairman cannot have been acting on his own. Subramanyam formally wrote to the finance secretary on June 30, 2001. Did any member of the Board of Trustees question him before that? No.

Instead, some of them quickly sold their own holding of units, yet the Tarapore committee would like to believe that they only acted on the basis of market information. If knowledge about UTI’s precarious finances was so well known, why did all hell break loose on Monday morning (July 2) when UTI announced a freeze?

According to information submitted to the JPC, Dr Bhagwati had categorically told the UTI chairman on June 29, 2001 that even at that late stage it should convert US-64 to Net Asset Value basis and not freeze the sale and repurchase of units. He had warned that such a move would have systemic implications. Why was the advice ignored? While UTI ought to have been working overtime to handle its own crisis, it was instead busy ‘bailing out’ the Calcutta Stock Exchange (CSE) by buying Rs 25 crore worth of DSQ Software stock at a price that was sure to collapse. The capital market regulator, Sebi had no powers over the US-64 scheme but was powerful enough to commandeer the services of UTI’s executive director B. G. Daga at Kolkata to observe Sebi’s efforts to salvage the CSE crisis caused by rampant illegal trading. The JPC is now demanding action against UTI officials, but has it found out that a letter from the finance ministry asking for action to be taken vis-à-vis the CSE bailout in May 2001 has been ignored by Sebi so far? It doesn’t stop here. JPC needs to find out why the finance ministry’s letters to UTI in August and December 1999, and March 2000 suggesting various reforms and asking US-64 to be made NAV based were persistently ignored. UTI’s excuse was that the Deepak Parekh committee had given it three years to go NAV based. Shouldn’t JPC ask whether the ministry’s letters were ever discussed by the UTI Board when it met five times between December 2000 and June 2001?

It is also pertinent to ask what each of UTI’s Board members said on the record when they decided to freeze the US 64 on July 2, 2001. Has the JPC asked for all these documents? The JPC has to seek all correspondence between the finance ministry and UTI before it exonerates anyone or indicts others. Maybe the new finance minister needs to take up this issue in the same manner that he dealt with the dead rats. We need people in high office, who can think independently and act swiftly to protect investors’ interest and restore confidence in the financial system

-- Sucheta Dalal