With UTI making some progress with efforts to raise Rs 3,000 crore through a soft loan from a consortium of banks, the immediate crisis over the freeze on the redemption of US 64 units seems to have passed. But is there any guarantee that this won't happen again?

By Roshni Jayakar

P.S.SUBRAMANYAM Ex-chairman, UTI

For three minutes on the afternoon of July 2, 2001, it looked like P.S. Subramanyam would get away with it. The meeting announcing the Unit Trust of India's annual performance usually happens in Mumbai. That this year's meeting was suddenly announced in Delhi was, in itself, unusual. The official version was that UTI thought it would be best to hold the meeting as soon as possible after its chairman Subramanyam's-he has since been removed from the post-meeting with officials in the finance ministry. The unofficial version was that UTI believed it could get off lightly in the city. Delhi's scribes won't be worried too much about the freeze on the sale and repurchase of units of US 64, went the reasoning.

For 180-breathless seconds it looked like the stratagem would work. The announcement was never articulated clearly during the briefing, and it was amongst the last items listed on the accompanying press note. So, when the field was thrown open to questions, most journalists preferred to flip through the note to see whether there was anything they had missed, instead of shooting from the hip. It took about three minutes for the first journalist to spot the item. Then the questions came hard and fast-either about the freeze itself, or on the state of US 64's reserves.

''We're still working on that,'' said PSS.
''Will they be negative?''
''Yes.''
''Pardon me, but did you just say the reserves of US 64 will be negative?''
''No I didn't. I was just responding to a question. We are still working on the reserves....'' And so on.

Finance Minister Yashwant Sinha has since cried MEA culpa, Subramanyam, replaced temporarily by former UTI Executive Director K.G. Vassal; the hunt is on for a successor; and the powers that be are busy working out a face-saving Plan B. It is also evident that the US 64 portfolio is a can of worms and that the value of the US 64 unit has fallen below par-Dhirendra Kumar, the CEO of Value Research, a firm that tracks the performance of mutual funds, puts it at Rs 9.75. What isn't so evident is what it will take to save the fund. And what isn't so evident is why the finance ministry persisted with PSS, despite warnings in many quarters-including the cover of this magazine; See The Rot in UTI, Business Today, May 6, 2001-that all wasn't well with the Trust and the man who was managing it.

Ignoring The Lessons Of The Past

The first time the US 64's reserves turned negative, the government bailed the fund out by infusing almost Rs 3,000 crore into it. Soon after, it instituted a committee headed by HDFC Chairman Deepak Parekh, to recommend what needed to be done to ensure the long-term viability of the scheme. Several recommendations of the committee, including ones on the US 64 becoming a NAV (Net Asset Value) driven scheme, creating a separate Asset Management Company (AMC) for US 64, and increasing the strength of the board of trustees from 10 to 15, remain unimplemented. The excuse proferred: these could be implemented only after the UTI Act was amended.

Continuing with a random pricing strategy, and not moving to an NAV-driven one, was a sure recipe for disaster. As early as April 2001, there were fears that the US 64's NAV could have fallen below par, but UTI continued to repurchase units at Rs 14.25 as late as May 2001, leading to a further fall in US 64's NAV. Expectedly some I-told-you-so excerpts from the Deepak Parekh Committee's report read like they were authored by Nostradamus. ''...the re-purchase price of the units should not remain delinked from their NAV indefinitely. If therefore, at the end of three year period the two are not in line, the Trust will be left with no alternative but to seek GoI support once again to provide the difference between NAV and the repurchase price for the units.''

If as many as 2.1 million unit holders, each with an average holding of Rs 50,000-60,000, have been impacted by the development, that's because small investors were drawn to the fund on the basis of the 'assured returns' it promised. Says Mark Mobius, President, Templeton Emerging Markets Fund: ''We in the fund management industry realised that the policy of guaranteeing a fixed return on equity investments in an open-ended vehicle was doomed unless the government was willing to continuously bail out the funds and make the difference. It is a testament to man's willingness to continuously pursue the unsustainable dream that UTI continued on the guarantee policies. Now we must move to the phase where UTI takes its place among the normal profit-oriented fund management company with independent management competing on equal terms with other fund management companies in India.''

1  2   

Issue Contents  Write to us   Subscription   Syndication 

INDIA TODAY |  INDIA TODAY PLUS | COMPUTERS TODAY  |  TEENS TODAY  
THE NEWSPAPER TODAY | MUSIC TODAY | ART TODAY | CARE TODAY

© Living Media India Ltd