UTI debacle and the life beyond

By S. Swaminathan

The abrupt manner in which the board of directors of the gigantic public sector mutual fund, the Unit Trust of India (UTI), virtually closed the doors against investors in its traditional ``blue chip'' - Unit Scheme (US-64) - has left millions in a state of consternation and disbelief. It needed little ``punditry'' in high finance to know that the UTI was being battered in recent months by the decline in share values all over the bourses. The anticipation of a lower dividend (now announced at 10 per cent) was not confined only to the school of intelligent financial analysts, given the lacklustre financial results of corporates during 2000-01.

What took investors by storm was the official revelation that the UTI could not sustain its solemn commitment on repurchase of US- 64 implying that it had been trapped in a desperate assets- liabilities mismatch. The assertion made by the Union Finance Minister, Mr. Yashwant Sinha, that the UTI had kept the Central Government in the dark about its decision to freeze sale - repurchase of US-64 makes matters much worse to the extent that the ``doings'' of the management of a public sector financial institution controlling over Rs. 70,000 crores of investors' savings have been kept out of the ``ken'' of the owner, which in the present case is the Central Government.

That it is a sinister tragedy of a complete breakdown of accountability in the UTI would be a mild stricture given the plausibility of a large-scale scam committed by the UTI board in collusion with corporate enterprises and other unscrupulous players in the secondary capital market. There is no question that the affairs of the UTI have come to be conducted in total disregard of the basic principles of corporate governance, of transparency and accountability to the investing public with reference to US-64.

That all these would call for a thorough probe is a reaction which need not be faulted for any imagined political partisanship. The resignation of the UTI chairman, Mr. P. S. Subramanyam, reportedly on the advice of the Government, should not be seen as a denouement of a sordid chapter in the 37-year history of the UTI but as a serious challenge to the managerial credibility of the institution in the harrowing current era of globalisation.

An outdated relic

The US-64, despite its immense popularity, is at least a decade out-of-date. It was all right till the second half of the 1980s when the equity cult was yet to shape the perceptions of investors for a public sector mutual fund to operate as an intermediary in the capital market for millions of middle-class households. Liberalisation of the capital issues market in the latter 1980s and subsequently the movement towards a market- oriented economy and particularly the entry of private sector mutual funds should, in the normal course, have persuaded the UTI to move away from if not liquidate an open-ended ancient compact called US-64 with a widely perceived (if disproved) freedom from risks and with tax incentives added, as a matter of public policy.

The fact that even in the post-liberalisation period, US-64 continued to command enormous investor confidence can only be regarded as the manifestation of a distorted capital market with the new issues market vegetating and a secondary market now and then running into paroxysms of volatility. When the major crisis for US-64 came into the open in 1998, the Government dared not look at the anatomy of the investment portfolio but instead opted for a quick cash injection of around Rs. 3,300 crores to shore up the UTI and mislead the investing public. At that time, there was stinging criticism that the old rule that permitted the UTI to manage the funds under US-64 without revealing the portfolio or the net asset value (NAV) was both contrary to the concept of a level playing field and to the dictates of transparency.

Beyond lamentation

Now that the US-64 appears to be overburdened with an equity portfolio (with underlying vulnerabilities both for NAV and earnings), a corrective strategy needs to be put in place. The well-known conversion route whereby US-64 holders can swap their investments for other UTI schemes on the basis of fair valuation of assets should be made available. In no case can a hush-hush of a bail-out at the expense of tax-payers should be entertained.

That leaves the question of protection for small investors to be satisfactorily resolved. Not all the 20 million investors belong to this category. A quick estimate by UTI ``insiders'' would put unitholders with less than 10,000 units at 25 per cent of the total number of investors. Should these investors not be given the exit option with a minimum repurchase price of Rs. 10 per unit? If notionally, this bottomline criterion represents a premium of, say, Rs. 2 per unit in terms of current NAV, the UTI could resort to a term loan from a public financial institution to meet the commitment.

All this will not obviate the need for restructuring the portfolio of investments, even granting that stock prices will emerge from the current bearish phase once the economic environment improves. Leave alone the question of succour for small investors in the US-64. The management of the UTI cannot continue to cling to the illusion that the US-64 is for eternity to come. The scheme has to be merged with other income-based schemes sooner rather than later.

Barring those who believe that the UTI has sunk into a morass from which it cannot be rescued, there are grounds to believe that the current crisis of confidence and credibility (and overall that of corporate governance) of the UTI is not beyond repair. This is not to say that those found guilty of delinquency, corruption, insider trading or whatever should be spared on a misperceived rationale of financial stability.

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