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Deep-probe UTI

IT IS WELCOME that a probe has been announced into the possibility of insider-trading in US-64. Institutional investors accounted for 90 per cent of the Rs 4,150-crore outflow that happened in April-May before the UTI announced a freeze on repurchase. Th e unprecedented bunching of repurchases in the last two months (a rare occurrence in US-64) points to some informed trading.

Even allowing for some smart money going out to avoid the risk of a downturn once NAV-based pricing is introduced and the tax restrictions on dividend-stripping, the repurchase activity was unusual. It is a sad comment on the state of affairs at the UTI and the Finance Ministry (its claims of a hands-off approach need to be taken with loads of salt) that the interests of the small investor should be sacrificed at the altar of corporate convenience.

The effort now should not stop with a mere probe. There must be a credible attempt to disgorge the profits -- which can be taken as the gap between the repurchase price and the NAV. It may also be instructive for the Finance Ministry and the market to lo ok at the havoc wreaked by corporate flows since 1994 to get a truer picture of the losses suffered by retail investors. This would also show how the UTI's obsession with raising funds has led to the sacrifice of the interests of retail investors.

The decision to focus on the role of trustees is long overdue as also a recast of the board to ensure presence of persons of integrity. Checks and balances need to be put in place to ensure that the UTI does not deviate from the investment objective of i ts schemes and improves disclosures to investors. The US-64 trouble shows up the utter lack of governance at the UTI as also the Finance Ministry. Indeed, the latter cuts an especially sorry figure when good quality oversight would have been expected of it following the earlier bail-out.

The Finance Minister has also announced a probe to see if the UTI's investments were made on a non-commercial basis. This should not be confined to the UTI's dalliance with Ketan Parekh stocks, which saw the UTI soaking up the floating stock and making p rice manipulation easy for operators. The investigation should also go back over the peculiar investment ways of the UTI.

For instance, in the mid-1990s, it picked up a strange instrument called compulsorily convertible warrants (a warrant, by its very nature, is to be exercised at the option of the investor, and attaching a compulsory clause makes nonsense of the concept) in Reliance Industries. To compound matters, the UTI exercised this instrument and took shares at double the market price. It is not known if the UTI struck similar other deals. These angles need to be probed, at least to serve as a deterrent and to impo se on the UTI certain basic investment discipline. It may also highlight the kind of practices that can lead any fund to doom.

As for the Finance Ministry's indications of bringing US-64 under SEBI and making it NAV-based, this must be done now. If necessary, the UTI Act should be consigned to the bin so that there is no confusion over SEBI's oversight. On the proximate events s urrounding US-64, the Finance Minister's claim that he was in the dark and came to know of it too late and did not want to disturb the board meeting as it could adversely affect stock market sentiments speaks very poorly of the quality of governance.

The stock market cannot be the central focus of all decision-making, especially when it comes to policy issues. In this backdrop, it must be hoped the Finance Ministry is serious about looking into the UTI's affairs, and is not embarking on a fire-fighti ng exercise to take the heat off its Minister and the Government.