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Will Govt end up pouring milk down the SUS'99 black hole?

Shaji Vikraman

W. CLEMENT Stone, who built a vast insurance empire in the US, once said, to be successful, one needs to incorporate three elements -- what to do and how to do it, see an opportunity as it develops and act when the opportunity presents itself. Wealth will then follow was the maxim.

This thought springs to mind a year after the bail-out exercise launched by the Finance Ministry for the Unit Trust of India (UTI). At least, the last of these elements seems to be at a premium in the case of the bail-out scheme -- the Special Unit Sche me '99 (SUS 99) -- cleared by the Government in 1999 to help the UTI, which was in a fix over its flagship scheme, US-64.

Now, a look back at the events then. In June 1998, trouble broke out in the wake of reports that the value of investment had depreciated to the tune of Rs. 3,566 crores in the US-64 due to a fall in the stock markets. The scheme's reserve account showed a negative balance of Rs. 1,098.49 crores.

Under mounting pressure, the Government appointed a committee, headed by Mr. Deepak Parekh, to sort out the mess. One of the committee's primary recommendations was to reduce the equity component of the scheme, as it had eroded the scheme's networth. Thi s could be done by transferring the substantial chunk of PSU stocks weighing on the scheme to a new one -- the SUS.

The SUS'99 was launched in June 1999 with the Government issuing special securities offering a coupon of 11.24 per cent in consideration for its investment of Rs. 3,300 crores in the scheme. PSU stocks taken at book value and worth this amount in the US- 64 scheme were transferred to the SUS'99, in which the Government had the option of redeeming the scheme after three years.

The agreement signed between the Finance Ministry (budget division) and the UTI provided for operational freedom to the portfolio manager, the UTI, to churn or shuffle it. No mention was made of the returns to be generated, although one would assume that the scheme would post at least a return on par with the special securities issued by the Government.

Although the malik of the scheme, Big Brother (read the Government) in true liberal spirit did not pontificate on stock-picking when handing out the dole of Rs. 3,300 crores, mid-way through, it sought monthly reports on the scheme's performance.

Now, with the scheme about to complete a year, the Net Asset Value (NAV) makes depressing reading, it seems. The depreciation of the portfolio against the funds infused -- Rs. 3,300 crores -- was substantial by well over Rs. 1,000 crores at the end o f April this year when the Sensex was close to the 4,800 level. So one can imagine what it is worth these days when it is almost 1,000 points lower.

True, the scheme with the kind of dud stocks it had did not start off smelling of roses. Early on, the fund managers did dump some of these, picking up infotech stocks such as Silverline, DSQ Software and the like. But the boom seems to have passed it by (Act when the opportunity presents itself - Clem Stone) and given the depreciation in the stocks, a helpless malik will have to reconcile itself to a long haul. Or console itself, as in the case of some weak banks who have been recapitalised, that it is like pouring milk into some deep black hole.

These are early days for surgery as the scheme's maturity is five years. It seems that a review will have to wait, from the Government side at least. The joke doing the rounds of the institution is that, at worst, an SUS-11 could be launched.

When it comes to investment by institutions, Karl Marx's claim about those who do not learn from the lessons of history being condemned to repeat it seems apt.

A representative sample of companies which figured in the list of private placements made by UTI between 1993 and 1995 include Ansal Properties, Derby Textiles, Filatex India Ltd, Hanil Era Textiles, Beta Napthol, Champadani Industries, Garden Cotton and Yarns Ltd, PVD Plast Mould Ltd, Hytaisun Magnetics Ltd and Bengal Tea and Fabrics. Most of the equity investment is now useless paper.

Circa 1999 and early 2000. The list for private placement of equity and debt now makes interesting reading -- Padmini Polymers, Geekay Exim, Welspun, Binani Zinc and Balaji Distillers, to name a few.

Interestingly, last week there was a lot of sound and thunder about financial institutions (FIs) flexing their muscles against Lloyd Steel. The promoters would be packed off, one report said. Officials here are laughing their heads off.

For, to use the SEBI Chairman, Mr. D. R. Mehta's quote, ``We (officials) are on a learning curve.''

The cynicism is thanks in part to the unending saga of the Modi brothers based in Delhi. The same stage props were in place over two years ago in the play staged by the financial institutions against them. The subject - sell off the 44 per cent stake of FIs in Modi Rubber Ltd.

Finally, after a global bid was invited for hawking off the FIs shares, the brothers were also included among the bidders. The buzz doing the rounds is that the props are being pulled out now that a Cabinet Minister has showed his interest in the affair. The ministerial intervention has resulted in a thundering silence on the issue.

Round one to the brothers. Will Lloyd Steel follow the same pattern?