Another Outrageous Bailout for UTI? Just why is investigating the institution beyond the JPC's purview? (21 May, 2001)
Even as the Joint Parliamentary Committee (JPC) chairman Prakash Mani Tripathi declared that the JPC will only investigate specific transactions of Unit Trust of India (UTI), reports about its shady investments and the disastrous depletion in reserves have begun to hog media headlines.
According to a leading economic daily, it is bailout time already. This time the government may have to dish out a whopping Rs 6,375 crore to save the Unit 64. The precise sum would depend upon the state of the capital market over the course of this month, but it would take more than a miracle to avoid a second bailout of the mammoth scheme. As the paper points out, the government could end up paying Rs 10,000 crore over two years in order to keep afloat a scheme with a Rs. 20,000 crore corpus.
Yet, the news has hardly caused much outrage this time. In fact, Finance Minister Yashwant Sinha was on television last week, calmly saying that he would like pension funds also to invest in equities. Newspaper editorials too are more agitated at Chandrababu Naidu’s demand of a Rs 1000 crore bailout for his beleaguered farmers from the Food Corporation of India.
Not even trade unionists or social activists seem to find it bizarre that when people in large parts of the country are starving due to the drought and earthquake ravaged Gujarat is struggling to survive the blazing summer, the finance ministry has been pouring tens of thousand of crores into repeated bailouts of malfunctioning government institutions and banks.
In 1999, UTI had to be rescued because it was too big to fail; and a run on the Trust would have destabilised the financial system. Nevertheless, it was expected that its deliverance would come with stringent accountability norms and fixing of specific responsibilities. No such thing.
Instead, UTI has learnt nothing from the 1999 debacle. Its research remains sub-standard or is ignored, its investments are highly questionable and its excuses for its bad investments simply unacceptable. Forget the justifications offered by UTI’s top brass, those of us who cover stock markets are will aware of how large deals continue to be fixed at UTI.
The fact is that UTI is allowed to swallow up so much public money, and its flagship scheme is consistently supported by government in refusing to submit to regulatory supervision, because it is a convenient handmaiden of the political establishment.
In 1999, when UTI was on the brink of a collapse, the Deepak Parekh committee was set up in order to obtain an ‘independent’ recommendation for a bailout. The committee obliged government and finance minister Yashwant Sinha promptly forked out over Rs 3300 crore to meet the shortfall in its reserves along with huge tax sops to keep other investors and mutual funds quiet. A Special Unit Scheme-99 was carved out of the US 64 by transferring its public sector shareholding to the new scheme at book value even though the market price was already much lower. Given the state of PSU disinvestment, the value of this portfolio (details of which are not available on UTI’s site) would only have depreciated.
The Parekh committee also wrote the script for the next bailout by granting it an expensive three years in which to make sale and repurchase prices based on actual Net Asset Value (NAV).
Here is what it said: “The committee is of the view that in the case of US-64 a period of about three years should suffice. By then it should be possible to bring the NAV of units in line with their repurchase price. The Committee also feels that even if this does not happen, the re-purchase price should not be delinked from their NAV indefinitely. If, therefore, a the end of the three year period the two are not in line, the Trust will be left with no alternative to see GOI support once again to provide the difference between NAV and repurchase price of units that the Trust will offer at that time. Only a clear commitment from GOI to stand by US 64 till it finally assumes the character of a NAV driven scheme will instill the required confidence in the US 64 investors”.
The Parekh Committee clearly anticipated another bailout, but it still did not recommend strict accountability conditions for the chairman and key fund managers. Consequently, the last two years have seen no decline in market reports about UTI’s links with fund managers or the manner in which several of its dotcom decisions were made. Shonkh Technologies and Cyberspace Infosys, are only two known examples, but UTI’s less known investments would also make interesting news. UTI may even get away by justifying some of its misguided investments in new economy stocks by blaming it on the Parekh Committee.
Apart from separate schemes for new economy companies, the Parekh Committee had some strange suggestions: “In order to help revive the capital market, the Committee recommends that commercial banks be encouraged to contribute Rs 1000 crore to Rs 1500 crore towards the corpus of a new equity-related scheme to be promoted by the Trust”.
To be fair, the government has also not implemented some of the Parekh committee’s important recommendations. The US-64 has not been brought under SEBI regulation and the practice of assured returns has also not been scrapped. In addition, its suggestion that UTI make strategic sales of large blocks of equity did not make much headway. It is now time for more recommendations and fresh deliberations before yet another bailout can be justified.
The question is who will investigate UTI? As our Members of Parliament have never failed to remind us, a JPC is the highest body in the country of investigation and fixing responsibility. Yet, for some strange reason, all its members are happy to accept the chairman’s curious contention that investigating UTI is beyond the committee’s purview. In fact, it is not. The terms of reference cover the fixing of responsibility in connection with ‘institutions’ and UTI has been notified as an institution by the government under Sec. 4A of the Companies Act.
Moreover, the Deepak Parekh Committee had said in 1999 that-- ‘With 200 lakh investors, public confidence in US-64 is a virtual proxy of public confidence in the Indian financial system’.
If the highest body of government is unwilling to deliberate an issue which is a proxy of public confidence in the financial system, then why have a JPC at all? -- Sucheta Dalal