US-64 episode raises questions on UTI's capabilities

By K. T. Jagannathan

CHENNAI, JULY 7. Investors of the `commoner category' have seen this in the past. The latest US-64 imbroglio is just another usual occurrence. And, most probably, they will get immune to such happenings over a period. Be it private non-banking finance companies or public institutions of the UTI (Unit Trust of India) type they collectively do not hesitate to ``distribute'' injustice to common investors. So, what is unusual about the six- month suspension of sale and repurchase of US-64 units, the so- called flagship scheme of UTI?

The country has seen many non-banking finance companies collapse like ninepins. Factors ranging from a slump in the commercial vehicle sector to sudden introduction of rigidity in RBI rules and mismanagement have all contributed to push the NBFCs into despondency. As a consequence, the hard earned money of poor investors has just evaporated in thin air. The regulatory authorities (should we say the state governments) moved in to initiate indiscriminate action against the owners of these NBFCs. No distinction was made between corporate NBFCs and unincorporated NBFCs. Likewise, no differentiation was made between wilful defaulters and those unable to pay. The good, the bad and the ugly among finance companies were all viewed as `rogues' in the eyes of investors, regulators and the like. So much so, the acronym `NBFC' has acquired a dirty connotation.

The move on the US-64 front comes against this backdrop. The creation of UTI through an Act of Parliament does not necessarily explain usual queries that come up in the wake of its decision to suspend sale and repurchase of US-64. Events following the suspension announcement suggest that the Union Government was taken by surprise by the very move. That a New Delhi appointee, Mr. P. S. Subramanyam, could independently go public with an unpalatable announcement impinging on millions of investors is plainly unthinkable. Mr. Subramanyam, nevertheless, has also shown inability to take professional decisions even after the recommendations the Deepak Parekh committee.

If investors have gone by `big names' while investing in finance companies, they have placed their trust on UTI solely because it is a government-backed organisation. Despite its investment risk, investors have always viewed US-64 as some sort of an FD (fixed deposit) which could also fetch capital appreciation. Many a US- 64 holder has joined the reinvestment scheme. Save for corporates, ordinary investors continue to stay with the US-64 for myriad reasons.

In what way investors in NBFCs are better or worse off than those who invested in US-64? To put it differently, in what way UTI is different from these defaulted NBFCs? An answer will expose the double standard in the treatment of NBFCs. If they were faulted for deploying investors' money imprudently - at times in their own arms , a largely Government-controlled UTI can also be blamed for investing US-64 funds in not-so desirable avenues. A quick vetting of the US-64 investment portfolio will tell its own tale.

Could a Government-owned UTI - among the largest institutional players on bourse - have functioned independently then? A case in point, according to authoritative sources, could be the way UTI went to bail out brokers by buying their outstanding positions when the Calcutta Stock Exchange was engulfed in a crisis recently. More often than not, assert privileged sources, UTI has used the `broker network' to drive stocks up and down sans any relevance to their fundamentals.

If UTI had moved to NAV based pricing of US-64 as suggested by the Deepak Parekh panel, it is argued, things would not have come to such a mess. Nevertheless, UTI's inability or unwillingness to readjust its equity portfolio in line with market reality has raised serious questions over the professional capabilities of the organisation. If indeed UTI is professionally managed, it has given room for speculation that the invisible hand of the government is always at play in the affairs of the organisation.

The remedy, in the end, lies in delinking UTI from Government interference. An independent professionally managed UTI can go a long way in retaining public trust through a transparent pricing of its schemes.

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