Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

October 01, 2000

Terminate Rajlakshmi but change Unit Trust

It is wrong to suggest that if the govt could bail out US-64, then RUS-92 should also be forced to continue

Unit Trust of India’s (UTI) betrayal of the hapless girl-child has such a nice evocative resonance to it that it was bound to make front-page headlines. In fact, UTI is not the only government-owned financial institution to betray investors. Remember Industrial Development Bank of India’s (IDBI) Deep Discount Bonds of 1996? A one-way call option tucked away in the small print has allowed IDBI to compulsory redeem the bonds on August 1, 2000 and write off investors’ dreams of collecting Rs one lakh in 2016.

UTI’s website says that the Rajlakshmi scheme, launched in 1992, offered an implicit return of 16.16% to 16.75% based on estimated returns available from capital market instruments then. What it probably means is that its expert fund managers made all the wrong assumptions in 1992 when they believed that high interest rates and a buoyant capital market would last forever.

Take a look at all the public-sector bank sponsored assured return schemes of those days Cantriple, BOI Square Double etc. The hefty returns were implicit in the very names of these schemes, yet all these are scrounging for loopholes to avoid keeping their tall promises. Yet, for all that one agrees with the decision of the Nagpur division bench of the Mumbai High Court in dismissing the writ petition filed by four little girls challenging the termination of Rajlakshmi.

UTI may be morally wrong in making absurd promises in 1992, but forcing it to continue with the scheme is damaging to other investors. In demanding the continuation of Rajlakshmi at the return assured in 1992, investors are behaving like the telecom unions. Sure, they expected to provide a secured future for their daughters; and yes, they will certainly have to work hard to find other investments which would provide a return which is as good or better. But it is wrong to suggest that if the government could bail out US-64, then Rajlakshmi should also be forced to continue.

The rest of us, taxpayers who did not invest in Rajlakshmi cannot be asked to cough up the money for UTI’s false promises. Instead the false sense of security provided by UTI’s government ownership ought to change. Let me confess that if it were a Morgan Stanley, a Merrill Lynch or any other foreign/private mutual fund doing what UTI has done, I would have reacted differently. One would then have demanded, as in the Canstar case, that their AMC/ sponsor organisation make good the returns assured to investors. UTI has none. Let us trace the genesis of ‘assured returns’. In the early nineties, when Canara Bank and State Bank of India set up mutual fund subsidiaries, the finance ministry in its wisdom allowed them to offer assured returns, overruling all oppositions from the Securities and Exchange Board of India (SEBI).

SEBI had warned against the dangers of assuring returns as stock prices and interest rates are both volatile. But the Finance Ministry wanted to encourage the mutual fund industry, and if this involved luring investors with the promise of high fixed returns, it was willing to let them do it.

What it was not willing to do, was to bring Unit Trust of India on par with other mutual funds in terms of taxation or regulation; it was unwilling to open the industry to the private sector/foreign mutual funds or to ensure stringent regulation to protect investors. UTI was allowed to remain a financial behemoth with huge tax advantages because it was an important tool for financial manipulation. It was useful during the initial divestment of public sector undertakings, it has regularly bailed out politically favoured industrialists by buying their shares and until a few years ago, was routinely asked to prop up stock prices. That is why, UTI’s demand for continuing with assured returns was supported over the warnings of SEBI.

In 1999 when the Deepak Parekh committee recommended the bail-out of UTI through an infusion of Rs 4800 crore through the Special Unit Scheme of 1999, it too did not seek the broad-basing UTI’s shareholding. It only asked UTI to set up AMCs, increase in the number of trustees on its board and revamp operations. It also criticised the fact that decisions are still concentrated at the top. Changes since 1999 have been mainly cosmetic and decisions are still concentrated at the top. UTI remains an unwieldy monolith with little transparency. Its fund managers have no incentives to beat the market because unlike the private sector mutual funds they are not rewarded with hefty bonuses nor are they worried about under-performance.

UTI continues to take pre-issue private placements of shares (Pritish Nandy Communications at Rs 300 when the market offering was at Rs 155) at twice that offered during a public offering and investors ask no questions. This is just one example. Speculation about political interference and cosy relationships with market operators also refuse to die down. Don’t forget that Unit 64 investors were quite happy to allow the exchequer to pay for the bail-out. The added sweetener of tax incentives killed all residual criticism and UTI, in fact, began to lead the country in preaching good corporate governance.

While we sympathise with the 12.5 lakh investors who hoped to earn high returns through Rajlakshmi, other investors cannot be asked to pay for it. Indian investors should realise that UTI offers no gilt-edged units. Instead of asking for the continuation of Rajlakshmi, investors along with BJP MP Kirit Somaiya (who has filed a petition against the termination of Rajlakshmi) should ask for a restructuring of UTI itself and to get it out of the clutches of government.

Maybe they ought to collar Finance Minister Yashwant Sinha when he arrives in Mumbai on October 5, to address a seminar hosted by an UTI associate. Since the seminar plans to debate issues such as risk management in Mutual Fund portfolios and the role of mutual funds, it seems the appropriate forum to make a demand for the privatisation of UTI and AMC’s owned by nationalised banks.