Sucheta Dalal :UTI bailout: The irresponsibility continues (9 September 2002)
Sucheta Dalal

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UTI bailout: The irresponsibility continues (9 September 2002)  



The ‘good plan’ for Unit Trust of India (UTI) turned out to be a rather ‘bad’ one. In fact, it is not even a complete plan. Almost everyday after the bailout was announced, the finance ministry has been adding caveats and sweeteners to it, or modifying the plan itself. The result: an uneasy fear that this whopping second bailout of Rs 15,000 crore is just another in a series of future payouts to UTI.

In principal, all bailouts are bad. They create a moral hazard, allow investors to be irresponsible, let finance ministers (FM) lie or plead ignorance about financial problems and have no finality. They do not improve accountability, nor eliminate political interference or even guarantee an end to further bailouts. In UTI’s case, the constant bearish pressure it has exerted on the capital market and the innumerable tragic cases of widows, pensioners, trusts and charities standing to lose large chunks of long term savings made a bailout politically inevitable.

The government is dipping deep into taxpayers’ pockets to pay off middle class investors that too in the year of a major drought. Will it clarify that investors who remain with UTI in future, do so at their own risk and not because of tax sops and government guarantees? Or will it promise to keep politicians off UTI’s back?

The bailout package promises nothing of that sort — in fact it threatens the opposite. In 1999, government handed out Rs 3,300 crore to UTI without fixing its core problem - lack of accountability and political interference.

As this column had predicted right then, the flawed bailout (which failed to force the Unit64 scheme to be priced by its Net Asset Value) paved the way for this one. This time the payout is five times bigger. In 2001, when UTI was on the verge of a collapse, the government opted for a sneaky cover up. It denied the magnitude of the problem and postponed its financial liability to May 2003. But as that deadline approached, finance ministry mandarins realised that they had to find another solution.

UTI’s large borrowing of Rs 5,000 crore (Rs 3,000 crore from banks and Rs 2,000 crore from other schemes) at just over call rates and redemption demands forced it to be a continuous seller in the market exerting a perpetual bearish influence on stock prices. Also, if government only paid the difference between NAV and the guaranteed return then US-64 would have to wound up.

Let us look at the various pronouncements. Firstly, the bailout formula makes little sense. If government only plans to make good the shortfall in UTI and maybe take care of its borrowings (Rs 5,000 crore), it still does not prevent the scheme from selling assets to meet redemption demands. The government has to give UTI the money upfront to stop it from selling. But before it does that, we as citizens have to ensure that government promises a hands-off approach and a competent management. Even a promise not to pressure the present chairman M.Damodaran and permit him to get on with the job of saving UTI would be good enough. Secondly, the plan to split UTI into the good and bad organisation may be the classic way of dealing with financial problems, but does not quite apply to UTI. Government plans to hawk the good organisation (which has no assured return schemes and hence no responsibility towards investors) or UTI-II, which has assets of nearly Rs 18,000 crore. But that won’t fetch it any more than three percent of the value of the schemes – in effect, the asset management fee. As for goodwill, it is a moot question whether UTI-II has any good will or brand value. Will an acquirer continue to use the UTI brandname? Unlikely.

Several mutual fund chiefs who seem to have reached for their chequebooks to buy UTI-II also seem to expect that it will come along with a distribution network and infrastructure. But so long as the problem child, UTI-I exists, it will need the entire infrastructure that has built up over the last four decades. The second issue is tax sops. Clearly the Rs 15,000 crore bailout may not be good enough to hold investors. So immediately after the package was announced, the finance ministry began to add tax sops such as capital gain exemptions as sweeteners.

The value of these sops has not been quantified. Rival mutual funds have welcomed the bailout and not protested against the sops, because it is only a matter of time before they begin to lobby for parity and a level playing field. This means that the hidden cost to the exchequer through tax breaks to the entire industry will go up dramatically. Government needs to spell this out upfront as a part of the bailout package. The third disturbing aspect is government interference. No sooner was the bailout announced, finance ministry officials began to order UTI not to indulge in ‘asset bleeding’.

This obviously referred to UTI’s block sales and aims at protecting ITC’s management and others like it who fear a takeover. What the finance ministry babus forget is that all such sales were at a premium to the market. The taxpayer cannot be made to pay in order to keep Yogi Deveshwar in charge of ITC. If UTI’s sale of ITC shares can fetch a hefty premium from BAT of UK (which already hold 33 per cent in ITC), it must be asked to sell the shares and use the proceeds to reduce the quantum of bailout –that is in national interest.

UTI’s 60 per cent investment in UTI Bank, 33 per cent in Infrastructure Leasing & Financial Services, five per cent in the National Share Depository and all other non-remunerative investments including UTI Securities, UTI Capital markets etc., which are not part of its core activities should be sold within a finite time frame. These sale proceeds should also be used to pay back the government and reduce the quantum of bailout. UTI’s middle class investors are being bailed out once again, but they now have a duty to ensure that government is forced to fix the problem.


-- Sucheta Dalal



 



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