Investing: The Queer Case Of US 64 Pg [2]

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The Queer Case Of US 64

A Clutch Of Bad Decisions

Subramanyam may blame the bear market and corporate investors for the state the US 64 finds itself in (See How Corporates Misused US 64), and while smart companies did make a quick buck using the US 64, he can't be absolved of all blame.

Trust No Talent

Is the performance of UTI linked to the kind of talent it fails to retain? Ask any of the 60-odd IIM graduates who quit UTI in the last two years why they left, and pat comes the reply: ''UTI is not a professionally-run organisation.'' Probe further and the IIM-alum unburden themselves further: the behaviour of the senior management is completely alien to the basics of sound fund management.

Put simply, the Trust, given the sheer size of its assets under management, offers young MBAs the kind of roles and responsibilities they can only dream of elsewhere, but does so in the context of a wholly unprofessional work environment. IIM grads who've deserted UTI's research department for greener pastures swear that investment reports put out by them and investment-decisions were rarely in sync. 1999, for the record, was the last year UTI managed to recruit from the IIMs.

He allowed the Trust's investments to be influenced by Ketan Parekh's moves on the stockmarket. K10 scrips, like HFCL, Zee Telefilms, DSQ Software, and Global Telefilms are part of UTI's portfolio. And with investment decisions being influenced by factors other than fundamentals, the US 64 portfolio (as also those of some other schemes of the Trust) boasts lemons like Cyberspace Infosys, Jain Studio, or Shonk Technologies. At the time this article went to press, the Jain and Shonk scrips were quoting at Rs 42, and Rs 51 respectively, while Cyberspace had been delisted from the stock exchanges.

Subramanyam also made no effort to attract and retain the best professionals in the business. Why, when Subramanyam was asked to resign, the finance ministry was hard pressed to find a replacement within UTI, and finally settled on K.G. Vassal, the senior-most executive director of the Trust. Strangely, Vassal has no experience in the fund management business and his responsibility as ED, was to oversee the human resource function.

What Stayed The Govt's Hand

The Ministry of Finance (MoF) claims that it has been in constant touch with UTI over the financial health of all its schemes (US 64 included), and over media reports about its involvement with the murky happenings in the Calcutta Stock Exchange. The Trust, sources in the MoF say, wrote to the ministry in March, May and June, but never indicated that it would have to freeze redemptions of US 64 units.

To be fair, the ministry doesn't really exert direct control over UTI according to the UTI Act. And in 1997, after looking at the business UTI was involved in, it was decided that there was no reason for the government to have a representative on the Board of Trustees. Since then, the MoF has not been party to any decision made by UTI.

Still, it is unlikely that either the UTI or Subramanyam, would have objected to any intervention by the MoF. For its part, simply on the basis of the bad press the Trust was receiving, the ministry could have certainly done more than just ask UTI for an explanation.

The only positive step that the finance minister seems to have taken is to rule out another bail out. In 1999, the GoI created a special unit scheme (SUS 99), got the Trust to transfer all its holdings in PSUs (book value: Rs 4,800 crore; market value: Rs 2,727 crore) to the scheme, and recompensed it with cash totalling Rs 2,727 crore. However, instead of deploying the funds conservatively, the UTI seems to have taken greater risks in subsequent years, banking on another rescue package should things go wrong.

Resurrecting The US 64

The MOF was hard pressed to find an interim head for UTI, before settling on K.G.Vassal (above). Fortunately, by mid-July, it had decided on a replacement for P.S.Subramanyam: bureaucrat M.Damodaran.

By the time this issue hits the stands, the GoI should have worked out a solution of sorts. The easiest option is to simply bail the Trust out again. The freeze on redemptions of units of the US 64 was brought about by the fact that UTI does not have the money for the same, courtesy the depletion in the value of its investments. The Trust is banking on a stockmarket revival in six months. But this looks unlikely. Ergo, a generous rescue package sponsored by the GoI could solve all of UTI's short-term woes.

The second option is something Subramanyam suggested before he was asked to go: the strategic sale of some of UTI's equity holdings. The GoI has ruled this out, and even if it were allowed only a fraction of the Trust's holdings will command a respectable price in the market.

The third option, and one that, almost certainly, will never be chosen by the GoI is the follow the example set by the Japanese Government with respect to the Long term Credit bank of Japan. In that case the Japanese Government first nationalised the bank and then sold it to strategic investors based in the US. Some fund managers suggest the GoI couldn't do better than bailing UTI out and then selling it to a global AMC like Fidelity, which could be toying with the idea of setting up base in India.

At the time this article went to press, there were reports that UTI was making progress in its efforts to raise a long-term Rs 3,000 crore soft loan from a consortium of banks at a sub-PLR interest charge. Efforts were also on to reduce the holding impact on the small investor (3,000 units or less), and decide the future of the US 64 itself. From August 1, 2001, investors holding up to 3,000 units would be able to redeem them at Rs 10.00. This repurchase price, the rescue package elaborated, would increase by Re 0.10 every month. And future sale of units would begin at a NAV-linked price in January 2002. And while no one has spoken of the 'checks and balances' bureaucrats and politicos are partial to, a fair amount of these may be put in place to ensure that the Unit Trust of India doesn't revisit its own inglorious past.

Smart Corporates & Shady Deals

In may 2001, UTI was repurchasing units at Rs 14.25 per unit. This, despite the fact that the markets had fallen and it must have been obvious to the UTI management that the NAV of the scheme had dropped and was estimated to be around Rs 9.70 or lower. Redemptions in April and May 2001 totalled Rs 4,151 crore and savvy investors, mostly corporates, exited the scheme at this price.

A cursory look at the data on unit holding patterns, shows that corporate holdings have steadily declined. From constituting about 83 per cent of the total outstanding unit capital of Rs 7,030 crore in 1989-90, corporate holdings fell to 39 per cent of the total outstanding unit capital of Rs 15,630 crore in 1997-98, and further down to 25 per cent of Rs 12,778 crore in 2000-01. By May 2001, most blue chip corporates seem to have exited the scheme entirely. By then, Telco had sold its entire holding worth Rs 145 crore; Bombay Dyeing, its entire holding of Rs 240 crore; Bajaj Auto, traditionally a large holder of unit, brought down its holding in May to 1.9 crore units; and IL&FS and several PSUs, too sold their entire holding. Was this insider trading by corporates? The finance ministry could order a probe into this but, as a broker says, ''You can't blame the investors for being smart.''

Moreover, till little over a year ago, some companies were using US 64 as a money market instrument, to park their cash surpluses. Instead of purchasing and selling units from and to the UTI, they would buy and sell in the secondary market through off-market deals. Not only were the units liquid, they ensured a post-tax yield of 11 to 12 per cent.

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