Collective downward spiral

THE question whether the government should have bailed out UTI’s floundering US-64 (unit scheme) generates quite as much passion as the Indo-Pakistan talks. Those who have invested in units proclaim that it is the government’s moral duty to come to the rescue of pensioners, widows and the honest middle class who put their faith in the government. ‘‘We thought US-64 was like a government bond,’’ is their contention. On the other side are those like myself whose fingers have already been singed by the capital markets and have discovered the hard way the first law of the share market: what goes up must come down. They don’t see why the tax-payers’ money should be squandered bailing out the largely middle class share holders. UTI has already frittered away the Rs 3,300 crore pumped in during an earlier salvage operation.

The UTI holders were taught by their mothers that if they can’t trust the government, they can’t trust anyone else. My mother assured me that you can always count on the Tatas to do well for the Parsi community and its shareholders. In the early nineties when the ACC share reached a dizzying Rs 12,000 and TELCO and other Tata shares were zooming, I saluted her wisdom. Now with the same shares biting the dust I realise in retrospect I should have been toasting Harshad Mehta and not the business acumen of the Tata family. And I don’t see the government handing out any bailout to the Tatas except to try and pass on a white elephant like Air-India, which any of the Tata company’s ordinary shareholder can recognise straightaway as a lemon. Similarly, those who were frantically snapping up ICE scrips, since they were told that they were investing in the country’s infrastructure and India’s future, feel equally cheated that their patriotic investments have gone unrewarded.

But why do you want to write on a subject when you know very little about UTI and high finance, a friend asked impatiently when questioned about UTI. A very justifiable concern except for the fact that while researching US-64, I discover that those who ought to have known better seem to have known even less. For instance, my colleagues in the office who claimed piously they were getting tax rebates on their dividends and were, therefore, under the impression that it was a government sponsored saving scheme like RBI’s bonds.

The fact, however, is that the tax concessions given to individuals for investing in US-64 were on par with those offered to other mutual funds.

Investors in US-64, by and large, consciously ignored the doomsday warnings in the newspapers. They presumed that if things went wrong the government was bound to come to the rescue. After all, there is safety in numbers and there are some 15 million unit holders, which is an influential constituency.

Any student of economics knows there is an element of risk in investing in equity. Investment in debt is safer though it offers lesser returns. In the last decade UTI has steadily hiked the ratio of its equity to debt investment and equity now is more than 65 per cent of the total fund. Ignoring basic prudential norms, UTI invested 20 per cent of its equity in just one industrial house, Reliance. In countries where mutual funds have to provide details of their assets so they can be categorised as high risk or low risk, US-64 in its present avatar would have been labeled a cowboy fund. Not a purchase for old age pensioners and others with meagre savings. But few quibbled while the going was good. UTI seemed an ideal investment; it offered liquidity, high dividends, modest capital appreciation.

If one finds the unit holders rather naive, Finance Minister Yashwant Sinha’s role is best described as clueless. And ironically he is actually anxious to establish his ignorance. His defence is that UTI failed to keep the finance ministry informed despite reminders. One does wonder why the finance ministry kept waiting patiently to be informed rather than bringing UTI in line. Unlike other mutual funds, UTI is not regulated by SEBI and is, therefore, directly the finance ministry’s responsibility.

Nevertheless, the ministry failed to insist that UTI implement speedily the recommendations of the Deepak Parekh committee, particularly the suggestion that US-64’s administered price be worked out on the basis of its net asset value (NAV). Until now the price was arbitrarily decided by UTI’s board of trustees who reportedly were dipping into US-64’s reserves to maintain the artificially high payouts. If this obvious exercise had been implemented last year when the markets were high and the redemption price equal to the NAV, the present crisis could have been entirely avoided. Equally intriguing is the finance ministry’s inertia as corporate houses coolly redeemed some Rs 5000 crore worth of US-64 bonds between April and June at a time when the redemption price was much higher than the NAV. In the bargain UTI’s enormous reserves were wiped out.

It is, however, unfair, to accuse the finance minister and the finance secretary of criminal negligence. After all, they were installed in the finance ministry for the very reason that they did not ask too many questions. If the present dispensation in New Delhi had wanted someone who understood the nitty gritty of finance and economics it would have appointed someone like E.A.S. Sharma or Shankar Acharya as finance secretary. But then the pot of gold which constitutes the UTI corpus of some Rs 60,000 crore could not have been manipulated quite so blatantly for coming to the aid of friends and allies of those in high places. There was constant political interference on UTI to boost the share price of some big companies and make dud investments in small unlisted companies. The most glaring example is the Lucknow software company launched by the prime minister himself. UTI bought its stocks after the software shares had started tumbling against the advice of its experts.

Predictably the company went bust. Nor was it merely coincidental that UTI bought heavily into shares associated with scamster Ketan Parekh in his bull run and which have all subsequently registered huge value losses. (Similarly after UTI’s earlier collapse it was discovered that US-64 was backing Harshad Mehta’s choice of shares.)

The finance ministry was apparently not in the picture when UTI was run to the ground as it is ‘‘an independent body’’. But it is from the office of the finance minister that the salvage package has been worked out. The finance ministry’s formula is to round up its usual suspects, SBI, LIC and nationalised banks, and direct them to provide soft loans to UTI and put a generalist babu in charge of India’s largest mutual fund. In any case most of the bankers own large chunks of US-64 themselves. Getting one arm of the government to bail out another is known in the ministry’s parlance as ‘‘cross-fertilisation’’. To others it seems more like a collective downward spiral.

Earlier Columns