UTI and IDBI: Killing two birds with one stone (2 Feb)
On February 1, one half of the erstwhile Unit Trust of India (UTI), which has been carved out as UTI Mutual Fund will celebrate ‘The art of investing’. After its second debacle and bailout, the half called UTI Mutual Fund, has achieved a spectacular revival under M.Damodaran’s leadership. So dramatic has been the turnaround that in October 2003, Damodaran was rewarded with an additional charge of the ailing Industrial Development Bank of India (IDBI). His expertise, commitment and track record is so rare among timeserving bankers and babus that it was considered a done deal that his appointment as IDBI chairman would be formalised in due course. The share price of IDBI immediately shot up from the high Rs 30s to over Rs 40 and continued to rise into the Rs 70s until mid-January. Damodaran helped steer the bill to convert IDBI from a development finance institution into a bank and had chalked up a host of plans to transform the beleaguered financial institution. But all those who looked for IDBI’s rapid development didn’t reckon with the games that our netas and babus can play.
My sources say that although Finance Minister Jaswant Singh backed Damodaran’s appointment as full time chairman and managing director for five years, he was overruled. The official explanation for scuttling Damodaran’s appointment was some hogwash about a selection procedure. But the fact is that the selection team had not found many willing takers for IDBI, mainly because all potential candidates wanted specific assurances about being shielded from corporate and political pressure and a free hand to choose their top management team. After much dilly-dallying and nit picking, the government has decided that Damodaran would remain at IDBI only until May and a ‘banker’ will be found to replace him. As a consolation he has been given a one-year extension at UTI Mutual Fund, which manages assured returns schemes.
In doing this, the government has managed to kill two birds with one stone— UTI as well as IDBI. If this sounds a trifle dramatic, then check the facts. In UTI, the government appointed a succession of ‘development bankers’, who managed to destroy the gigantic mutual fund twice over in under seven years. After all, this was the same class of people who deftly built massive bad debts through reckless lending and inept monitoring and brought IDBI and IFCI to the brink of collapse. If Damodaran achieved a remarkable change without being a trained fund manager, it is not because he has special skills as an IAS officer, but because of competence, honesty, ingenuity and sincerity. And it is these qualities that are bringing battered investors back to UTI. Similarly, if Damodaran’s interim appointment at IDBI was enough to send the stock price up to the high Rs70 (it has dropped in the last fortnight) it is on the expectation that the same qualities would work their magic at the ‘development’ bank. But investors didn’t reckon with the wiles of industrialists and the pusillanimity of politicians. Ironically, while government is staking claim to having created a Shining India, they don’t realise how easy and simple it will be for these two institutions to relapse into the same morass that they were in.
The IDBI scrip, at Rs 67 plus, is quoting at a six year high. And it is extremely easy for government to believe that all it has to do is to get a development banker—probably an insider who has shown no previous dynamism— merge IDBI with a nationalised bank with a large retail network and its problems will be over. After all, hasn’t it managed to get Punjab National Bank to swallow two lemons in the form of Nedungadi Bank and more recently IFCI? This new faith in a ‘development banker’ is delightfully ironic. The same babu network, that assiduously foists IAS officers on to ever new committee, board, organisation, commission and regulatory body that is set up by government, suddenly shows a preference for a ‘veteran banker’ even in the face of proven competence by one of their own fraternity. In October 2003, reputed Central Banker, S.S. Tarapore had written in The Financial Express that ‘‘the track record of the government is that it waits till a bank/institution is about to burn to ashes before finding a fireman to douse the flames. When the three weak banks were basket cases, a government official was lodged in the Reserve Bank of India to save these banks. When Unit Trust of India burst into flames in mid-2001, the government found a wizard to save the ship. As IDBI is facing an identity crisis, the government has picked a miracle man to save the institution. Is it only accidental that in all three cases the fireman turns out to be M. Damodaran?’’ Tarapore had also said, IDBI’s turnaround would need a competent chairman, who has the powers to evolve a viable strategy for the bank and if government followed a hands-off policy. Clearly, there was a lot of hope riding on Damodaran’s appointment at IDBI. All that is now history. But the bigger damage may be to UTI Mutual Fund. It is not as though IDBI’s loss is UTI MFs gain, because even there, the government has given Damodaran only a one-year extension. Any simple poll of investors would show that they are willing to give UTI MF another chance only because they trust the man in charge. And that is the way investors around the world decide on mutual fund investment, when there is no government guarantee. After all, a set of politicians who have done an ugly about-turn over who will head IDBI, and have yet to divest their control over UTI, cannot be depended on to take the right decisions regarding the Fund’s long-term leadership and management either.
-- Sucheta Dalal