Missed signals

THE Unit Trust of India (UTI) Chairman makes it a point to meet the Joint Secretary (Investment) in the Ministry of Finance once every week. They discuss updates on schemes, portfolios and new decisions among other things. The Joint Secretary then reports to his superior, who is duty-bound to inform the Finance Minister of important developments. Therefore it seems absurd that Finance Minister Yashwant Sinha denies knowledge of the UTI's decision to freeze its Unit Scheme-1964 (US-64).

The release of former UTI Chairman P.S. Subramanyam from judicial custody on August 7 and the subsequent investigations are expected to bring to light the rot within the UTI and its links with the government. While granting bail to Subramanyam, the Judge said a lot of incriminating documents had been unearthed and phone calls made by him to the Finance Ministry and market operators were being traced. He has, according to the CBI, confessed to some of the charges. An informed source close to Subramanyam told Frontline that Subramanyam had written to Finance Ministry officials on May 18 and June 30 warning that the US-64 scheme would have to be frozen on account of the poor condition of its portfolio.

On July 2, Subramanyam announced the suspension of the sale and redemption of US-64 units for six months. He "resigned" the next day and the government, in an attempt at damage-control, appointed M. Damodaran, who was an Officer on Special Duty in the Reserve Bank of India, as the new Chairman. It also said that a "bail-out" package would be announced. On July 15, Damodaran said repurchases in respect of US-64 would reopen on August 1 and investors could repurchase up to 3,000 units at a price of Rs.10 each during the month. The government guaranteed that the repurchase price would be increased by 10 paise every month until May 2003.

On August 1, the UTI received only 3,865 requests for repurchase, covering units worth Rs.56.39 lakhs, from all its branches. By August 3, it had received 15,824 requests covering units worth Rs.2.22 crores. "The numbers are normal," said Damodaran.

Meanwhile, the CBI raided the residence and offices of Subramanyam and two other UTI officials on July 20, before arresting them on charges of cheating, conspiracy, misuse of office and misappropriation of public funds.

It is possible that Subramanyam was under pressure to purchase 3,45,000 shares of Cyberspace Ltd, a little-known company, at Rs.930 a share, although its scrip had never crossed Rs.2 on the stock exchange. During interrogations, he apparently told the CBI that "orders came from the top".

"Ever since July last year there have been warning signals that US-64 was in trouble," an investment banker told Frontline. That was when the UTI, for the first time, disclosed the portfolio of US-64 and three other schemes in July 2000. The most noticeable feature of the US-64 portfolio was that Rs.10,910.505 crores or 52.98 per cent of net assets, had been invested in equity of only 26 companies, 11 of which were new economy companies. Thus when the market started falling and the Ketan Parekh scam exploded, US-64 was left holding vast amounts of worthless stock.

Another warning signal came in November 2000, when the UTI released its first quarter figures. The US-64 had suffered capital erosion of over Rs.2,590 crores or 12 per cent of the total assets under management. As the UTI is governed by the UTI Act, it does not have to disclose its mode of pricing, unlike other mutual funds, which are obligated to do so under the regulations of SEBI. Last year, the UTI decided to peg the scale and repurchase prices of US-64 units to the scheme's net asset value in an attempt to become more investor-friendly. The market had at that time predicted a large-scale pullout before the decision was implemented.

Another indicator was the UTI's contrarian approach to the market. They stopped working with the market, and started dealing with operators instead. The UTI began to buy high and sell low. The fact that the corporates pulled out just before the dividend announcement was certainly cause for supicion, the banker said.