In June 1998, Shriram Mutual Fund bought 1,20,600 shares of Videocon on the BSE through an associate firm in order to bail out a clutch of brokers who were on the verge of default. These brokers were involved in furthering scamster Harshad Mehta’s big comeback attempt with price rigging as his main operating strategy.
On February 2, , the Sebi completed its investigations and decreed that Shriram Mutual Fund’s actions were ‘detrimental to the interest of its investors’ and imposed stringent penalties against it. It asked the Fund’s sponsors to pay up the price difference of Rs 19 per share between the purchase price and market price of Videocon shares; it asked its MD and two of his executives to resign and ordered a change in the composition of Shriram’s Board of Trustees.
On March 9 2001, a bigger mutual fund followed in the footsteps of Shriram Mutual Fund and was involved in a similar bailout. It was none other than the mammoth Unit Trust of India (UTI), which bought a hefty 13,30,000 shares of DSQ Software to bail out the Calcutta Stock Exchange (CSE). According to UTI’s executive director B G Daga, these shares were bought at a Rs 189, which was a discount to the ruling market price. Daga also says that the shares worth Rs 25 crore were bought directly from the CSE in order to help the bourse complete the controversial settlement No 148. These shares belonged to broker Dinesh Singhania.
UTI already held large quantities of DSQ stock, large chunks (around 56 lakh shares were purchased at an average price of nearly Rs 2,000 in February-March ). It was only in Jan-Feb 2001 that it had begun to sell small chunks of the scrip (five lakh shares) in line with the decline in the slowdown in the IT sector. In fact, UTI’s average holding price for the 23.7 lakh DSQ Software shares that it owns is approximately Rs 760.
The price of DSQ Software has since halved from its bailout level of Rs 189 to around Rs 90, causing a loss of Rs 12.5 crore to investors in one single deal.
Even though UTI bought at a discount to market, it was surely obvious to everybody that all shares associated with stock broker Ketan Parekh would continue to drop for several weeks more. UTI’s decision to bail out the CSE becomes even more controversial when one considers the fact that it has slashed payout on its MIP-95 and MIP-96 schemes to five per cent; and that it is already discussing a second bailout of the Unit 64 scheme with the government.
The US-64, it would be recalled, faces a shortfall of over Rs 6,000 crore between its Net Asset Value (NAV) and its repurchase price. So, if Shriram Mutual Fund has been punished for bailing out brokers at the cost of its unit holders, then so should UTI.
In Shriram’s case, Sebi had said that the purchase price was ‘not in the best interest of the investors and were made for extraneous considerations’. It also said that ‘schemes of the MFs were not handled in a prudent, diligent manner.” Sebi had held that the transactions were done in a manner that was “detrimental to the interest of the investors”.
All of the above applies to UTI’s decision to bail out the CSE. The shares of DSQ software have since halved, and this is seriously detrimental to investors who already face the prospect of a steep cut in dividends by UTI. In the circumstances, the Fund has no business bailing out anybody, especially at a loss to unitholders. What makes the situation even more bizarre is that the bailout of the CSE was supervised by none other than a divisional chief of Sebi with Daga of UTI acting as an observer.
Moreover, the Sebi chairman himself oversaw the entire bailout effort. Daga argues that UTI’s deal is ‘not similar’ to Shriram’s, because the shares were the property of the CSE and not the broker and the cheque was paid directly to the exchange. Secondly, Daga says that Shriram Mutual Fund had bought above the market, while UTI’s acquisition was at a discount. That argument also seems immaterial because the scrip had been falling at 16 per cent a day since then, as was clearly expected to drop further.
Thirdly, Daga says that the CSE offered him shares of three other companies but UTI had only picked up DSQ Software. That seems rather irrevelant, since the Sebi inspection report indicates that in March 2001, UTI had clearly bailed out brokers holding Himachal Futuristic Communications, Global Telesystems and Zee Telefilms too. The CSE bailout shows that neither UTI nor Sebi seems to have the least notion of what constitutes fiduciary responsibility to unitholders. It is one thing for the Sebi to make efforts to try and avoid a contagion effect damaging investor sentiment.
Daga points out that over the last decade UTI has often been asked by the government to stabilise the market. The difference is, that in those days, the UTI was an extremely profitable institution. The US-64, its main scheme had an NAV, which was a closely guarded secret, but was always believe to be twice the average of its sale and repurchase price. Also, the situation is different today. UTI has already been bailed out once at the cost of the general public; it has drastically cut the returns on its monthly income schemes and has abandoned the Rajalaxmi scheme.
Also, if Sebi had wanted to bailout the CSE, it ought to have approached the finance ministry instead of suggesting a surreptitious deal with UTI. The question is, when a MF transgresses its fiduciary duty in consultation with or at the request of the regulator, who will play judge and decide the issue? It will have to be the job of the JPC, which has still to decide whether it plans to investigate all aspects of UTI’s operations. Alternatively, UTI’s disgruntled unitholders may decide to drag the MF as well as the regulator to the court.