What should the UTI probe do?

S. Vaidya Nathan

IN TRUE government style, the Finance Minister, Mr Yashwant Sinha, has announced a probe into various aspects of the Unit Trust of India (UTI).

The primary idea of the probe may well be to deflect attention and take the heat of the Finance Minister for the second crisis in three years in the UTI.

But on a more optimistic note, one must hope the probe will be a serious effort and will be entrusted to a set of people who are well-equipped to handle complex questions of investments and insider-trading. This is the least the Government owes the long-term retail investors in the UTI.

An objective and independent probe without any extraneous pressure can, indeed, bring to the fore the various aspects of inept management by the UTI that has led its investors in US-64 to a black hole and made for poor showing in other schemes, including income plans. The probe should focus on the following areas among others:

* The probe should not be restricted to events of 1999-2000. An enquiry should start from all major aspects of the US-64 operations since 1992-93. The rot set in 1993-94 and all those responsible since then for bringing matters to such a pass deserve to be hauled up.

* Starting from the most recent events, the probe should first address the likelihood of insider-trading involving leakage of information that the repurchase facility would be suspended. Of the Rs 4,141 crore pulled out in April-May 2001 (an unusual occurrence), 90 per cent was by the corporate sector. The probe should look at whether inside information aided the corporate sector in this and if there was any quid pro quo. Just this pullout has cost long-term investors around Rs 1,300 crore or Rs 1.21 per unit.

* The probe should make public the names of all companies that pulled funds out in April-May and the duration for which such units were held. This would provide the much-needed transparency on what happened to merit the big pull-out. If insider/informed trading is evident, the probe must recommend concrete ways to disgorge profits made by such investors.

* A close look at the UTI's bail-out operations on the Calcutta Stock Exchange is needed. When some of its brokers were in trouble, the UTI and an NBFC bailed them out by buying shares of Himachal Futuristic and DSQ Software among others. These shares, on a relentless downtrend, carried further downside risk and with fundamentals and management quality, that could be called to question. Why, then, did the UTI do this bail-out or was it directed to do so ? Or, was it coming to the aid of the Ketan Parekh group?

* The dalliance with Ketan Parekh group should be another focus area. The Deepak Parekh Committee, which in 1999 suggested a few sensible steps to whip US-64 into shape, wanted the UTI to take advantage of opportunities in the new economy. But it is certain that none of the committee members would have imagined the UTI would do this by going along with an operator. Till prices fell sharply, the UTI's tech/media sector holdings included numerous Ketan Parekh favourites -- Zee Telefilms, PentaMedia Graphics, PentaSoft, DSQ Software, Himachal Futuristic, Aftek Infosys, SSI, Global Tele-Systems -- to name some, at the expense of better stocks. For sure, a few private sector funds also did momentum investing. But most got out and a few made some profits as well. The UTI claims it has booked profit of Rs 945 crore in Himachal Futuristic in the last three years. But it is saddled with a large quantity of some of these stocks. Knowingly or unknowingly, it may have been instrumental in shrinking the floating stock. This made price manipulation easy.

* Some of the UTI's investments in companies such as Broadcast Media, Cyberspace Infosys (picked up at Rs 935 per share), among others, also merit a close look to see if they were driven by commercial consideration.

* The probe should also focus on why the UTI did not address three key recommendations of the Deepak Parekh Committee -- a switch to NAV-based pricing, a greater tilt to debt in the portfolio and a separate asset management team (or company) for the US-64. On the debt market aspect, the UTI's argument that it is illiquid is valid only to a point. Even if one takes the debt market investments made by the all debt-oriented schemes of the private sector funds since the Deepak Parekh Committee report, it would be comfortably exceed the debt portfolio of US-64.

Unlike the equity segment, the primary market for debt has been vibrant. However, the secondary market is good only for government securities and a few corporate bonds. In this context, the fact that the 35 per cent debt in the US-64 portfolio would have been far lower if not for the five-year government securities worth Rs 3,300 crore issued as part of the bail-out in 1999, is notable.

* The probe should seek to look at the role of the UTI during Mr S. A. Dave's tenure. During this period, the UTI top brass professed that they would give the US-64 a small investor orientation. But when it came to the brasstacks, they seem to have done of little note. Volatile corporate flows were welcomed. Even an unpleasant large pullout in 1995 did not deter subsequent coveting of such flows. The problems of investing a major portion of the additional funds (the malaise started in 1993-94) led the UTI to more equities and at high prices at that. The probe should ferret out the details on the adverse impact of volatile corporate flows between 1993 and 2001. The entry and repurchase prices for deals should be gone into to quantify the possible losses to long-term retail investors who reposed almost blind faith in US-64.

* A close look at some of the deals done by UTI in the earlier part of the 1993-2001 period is also warranted. For instance, the UTI, the LIC and the GIC together picked up Rs 945 crore worth of Reliance Industries' stock through a preferential offer in 1994. Then in March 1995, the UTI, in a decision that no rational investor would take, converted Reliance Industries' warrants into shares at Rs 401 per share when the market price was Rs 280 and only headed down later in that year. All such big deals, flow of funds from companies if any, reluctance to sell a select few stocks and inter-scheme transfers from US-64 to other UTI schemes, deserve a close watch. But it should not turn out to be an exercise in imparting fear in fund managers. The focus should be on highlighting irrational investment decisions and to seek a deterrence against such investments.

* The misleading promotional campaigns done by UTI on US-64 too merits a look-in. And, last but not the least, the probe must be time-bound and the entire report made public within a specified date. Only then would Mr Yashwant Sinha's probe be meaningful and offer some accountability (late in the day) to investors who have reposed faith in US-64 and other UTI schemes over the years.

Pic.: Mr Yaswanth Sinha, Finance Minister... A deep-probe or a smokescreen?