Sinha faulted for UTI crisis

By Alok Mukherjee

NEW DELHI, JULY 7. The Union Finance Minister, Mr. Yashwant Sinha, is in trouble again. Having barely managed to survive the stock market scam which exposed the shabby supervision by at least two market regulators - the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) - fingers are now being raised at the Finance Minister and his team for being oblivious to the goings-on at the Unit Trust of India (UTI).

While the market was anticipating a low dividend for the US-64 scheme, what compounded matters was the suspension of the scheme for six months which effectively means blockage of investor funds for that period. The Finance Ministry reacted instantaneously and what has surprised analysts is the prodding from the first day itself for lifting of the suspension of the scheme.

The Finance Ministry is now being faulted on two grounds. First, it just got the resignation of the then UTI Chairman, Mr. P.S. Subramanayam, but did not order a probe into what went wrong with the investment pattern of the US-64 which resulted in the suspension of the scheme. According to the analysts, the signal that came out from the Ministry was that the then UTI Chairman was faulted only for the Board's decision to suspend the scheme and that his removal would set things right in the organisation. No attempt has been made to find out why UTI did not re-balance its portfolio after the 1998 crisis, especially since the stock market boom from August 1999 to about April 2000 provided it an opportunity to offload its equity profitably and get back to the debt market for stable, assured returns which US-64 investors basically want.

`Cure worse than disease'

Second, analysts believe that the cure that is now being suggested could actually turn out to be worse than the disease. The pressure on UTI to re-open the scheme to provide an exit route to investors of the US-64 could actually run the scheme, if not UTI itself, to the ground while at the same time, the investor is likely to be short-changed on his investments.

According to these analysts, it is now official that the reserves of the US-64 scheme have probably turned negative. In that case, redemption of the units could not only lead to a further draw down of the reserves, but UTI would probably have to borrow to make the repurchases. In that case, the Trust would have to service these loans, which in turn could affect other schemes of the UTI. Alternatively, the Government would have to extend another bail-out package, which simply means tax payers' money would be used once again to bail out a bad management.

For the investor, the loss is likely to be higher. While the dividend of 10 per cent is the lowest that the investment in US- 64 would fetch, the exit price is likely to be much lower that the original purchase price that the investor paid, leading to capital loss in this case.

While UTI has not yet worked out the net asset value (NAV) of the US-64 scheme, experts project the NAV to be in the region of Rs 7-9 per unit, lower than the face value of Rs 10 per unit and much lower than the purchase price prevailing in July 2000.

`Investors face dilemma'

Now, when the UTI works out an exit scheme most investors would be faced with a dilemma. One option would be to accept a capital loss and sell back the units at a price lower than the purchase price.

The second option would be to wait out the suspension period. But in that case, doubts would linger about the future of the scheme, especially after the reserves are drawn down and fresh sales barred for that time period.

Also, the overall perception about UTI as an institution has been considerably damaged and this could impact on the other schemes of UTI as well. Hence, investor confidence would be shaky about UTI and the dilemma for the investor would be either to quit at a loss or to continue with a risky investment.

Analysts believe that apart from telling the UTI management to re-think its suspension decision, the Finance Ministry should also institute a probe into the actions of the top management over the last financial year if not more.

The Ministry should also arm itself with facts as to why redemptions were allowed as late as April and May this year at a high price of Rs 14.25 per unit when the management was aware that the NAV of US-64 was falling drastically.

That many corporates benefited from the April-May redemption offer is now well known and whether there was any insider trading (in terms of advance information) should also be found out.

All this information is necessary not only to pin down responsibility within the UTI but also to set the organisation on the right track. Additionally, the Government and particularly the Finance Minister are bound to face flak in Parliament on the UTI imbroglio and Mr. Sinha would find it difficult to ward off criticism that he and his Ministry slipped up once again.

As it is, the pressure on Mr. Sinha is tremendous. The economy is in a drift and the only response that the Ministry has been able to think up is to increase spending. The employment scenario is pathetic, with a large number of semi-urban and rural industries shut down for good, leading to mass unemployment.

The pressure to globalise has had its impact in terms of lower returns on all types of investment, leading to disenchantment among the middle class, the traditional votebank of the BJP in the recent years. And now the burst of the UTI bubble. Mr. Sinha is indeed in trouble, again.

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