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UTI trustees' role under Govt scrutiny

Shaji Vikraman

NEW DELHI, July 8

THE role of the board of trustees of the Unit Trust of India (UTI) is now under close scrutiny, with the Government holding the view that they had failed to carry out their fiduciary responsibilities to unitholders, especially on the investments made by the Trust.

The issue of access to privileged information on the performance of US-64 and the plan to close the repurchase and sales window, which had resulted in many leading corporates and top commercial banks making a beeline for redeeming the units of US-64 in A pril and May, also needs to be probed, according to Government officials.

The board of trustees includes the Chairman of the State Bank of India, Mr Janki Ballabh, the Chairman of the Life Insurance Corporation of India, Mr Bajpayee, the acting Chairman of the Industrial Development Bank of India, Mr S.K. Chakraborty, the Mana ging Director of Gujarat Ambuja, Mr Sekhsaria, noted chartered accountant, Mr Chitale and Mr V.V.Desai.

Although the issue of conflict of interest of some of the trustees on UTI's board, whose organisations are also in the asset management business was raised a few years ago, it was subsequently glossed over even during the 1998 crisis. Both the SBI and th e LIC as well as IDBI have sponsored AMCs and therefore, the principle of a Chinese wall should have been adopted.

Questions are also being asked about the interest taken in the affairs of the Trust by some of these trustees. One trustee from the financial sector has not attended most of the board meetings while refusing to nominate another senior officer from his or ganisation.

The Government has said that although the board of trustees met on May 15 and then on June 15, the Finance Ministry was totally in the dark about the agenda. The UTI Act does not impose any obligation on the board to keep the Government posted on the dev elopments in the Trust or its performance. On paper, the Government's role is restricted to the appointment of its Chairman.

Just a couple of days before the crisis blew up on July 2, Mr P.S. Subramanyam met senior officials in the Ministry, although it is unclear what transpired during the meeting.

The other issue which has not been addressed is that of a corporate chief sitting on the board of trustees of UTI, when the company has substantial investments in the mutual fund. How does a potential conflict of interest then get resolved?

According to officials associated with UTI, there has not been any record of the board of trustees objecting to some of the dubious investments made by the institution since 1994-95. It was Parliament's standing committee on finance which forced the trus tees last year to slash the powers of the Chairman to sanction investments, from Rs 50 crore to Rs 40 crore.

In their view, the rot really set in from 1996-97, when the Trust announced a 1:10 bonus for US-64 unitholders and topped it with a dividend. The reserves of US-64, which aggregated close to Rs 2,500 crore in 1994-95, were then capitalised and in the sub sequent years, the Trust dipped into the reserves to pay the dividend.

Officials in the Trust also recall how until 1994-95, the pricing of US-64 always used to be at a discount to the NAV worked out internally by the management. Since then, it has been the reverse.

What was worse, during the last year (1999-2000), the top management of UTI led by its Chairman, decided to transfer most of the performing assets held by the monthly income schemes to US-64, the officials said. This was done to prop up US-64 which is se en as the public index of UTI's performance. In the process, the MIPs were hit.