S.A. DAVE: UTI's investment in Reliance was made while he was chairman

THE AMBANIS: Reliance justifiable claims, UTI's investments in RIL were profitable

P.S. SUBRAMANYAM: Some analysts claims the RIL investment started UTI down the perilous path of equity investments

You could attribute the mess at the unit trust of India (UTI) to the institution's weak systems and processes; or to the penchant of its chairmen for taking highly-risky trading positions; or to the absence of a solid audit system; or the reluctance of the fund to be transparent with its net asset value (NAV), now languishing 45 per cent below the administered price of Rs 10.50. But in certain quarters, the decline in UTI's fortunes since 1995, which has eventually resulted in UTI's current negative net worth, is being ascribed to the snowballing result of the trust's investments in one group of companies: Reliance. The Tarapore committee, set up to look into the UTI's operations over the past decade, too more than alludes to this possibility by pointing out UTI's investments in Reliance Industries Ltd (RIL) were ''imprudent, which fortuitously turned out to be right''. For, it was only after UTI made a Rs 1,073-crore investment in RIL seven years ago that the institUTIon started going down the tubes. It's another matter that of the 19 companies the committee zeroed in for ''individual examination,'' the investment in RIL was the only profitable one over the past 10 years. According the company, even at today's prices, the trust has made profits of roughly Rs 850 crore on Rs 1,073 crore investment.

ANYBODY LISTENING

But the question still begs an answer: Were the investments in Reliance responsible for turning US 64 into an equity fund, and thereby a high-risk scheme? After all, the proportion of equity in US 64 rose from 39 per cent in 1993-94 to 50 per cent a year later after the investment in RIL.

The Reliance argument is that the Rs 1,073-crore investment represented less than 2 per cent of UTI's corpus in 1994. That UTI has taken a bashing is not because of Reliance but because of the poor price performance of the other stocks in the UTI portfolio. ''UTI has made profits of nearly Rs 3,000 crore in the past seven years in UTI and RPL (Reliance Petroleum) investments. If not for these profits, UTI would be in a worse shape, and the deficit in the reserves would have been even higher,'' points out a Reliance spokesman.

Perhaps. But the very reason why UTI made a cash loss of roughly Rs 1,000 crore in 1994 was because it paid too much for the Reliance shares-too much when compared to the discount at which the Ambanis acquired Reliance shares in 1993. RIL had issued NCDs with equity warrants exercisable at just Rs 150 per share, whilst UTI's average price works out to Rs 389 per share.

Reliance officials counter by pointing out that the comparison is incorrect, because the UTI transactions happened in 1994, whilst the issue of warrants to the promoters took place more than a year earlier (13 months prior to UTI's first transaction, and more than 20 months prior to the second). In that time, the RIL share climbed from Rs 250 to above Rs 400. As for the price of Rs 401 per share for the first tranche paid by UTI in 1994, that can be justified since the net price to UTI for the first tranche works out to Rs 337 per share (Rs 401 minus the interest of 16 per cent for a year earned by UTI), which was in fact at a 4 per cent discount to the prevailing market price at that time, of Rs 352 per share. Similarly, investment in the second tranche was done at Rs 385 per share, even though the UTI share was quoting around Rs 410-415 at that time.

Other allegations against Reliance are that UTI made cash losses of Rs 500-600 crore in five years as a result of the Rs 1,073-crore investment; and that the negative net worth of UTI is almost equal to the loss consciously incurred by UTI in the RIL investments. The Tarapore committee, for its part, has had enough of audit reports (three different auditors have looked into the matter), and has recommended that its findings be put before a pre-investigative body. Till then, RIL will continue to enjoy the quaint status of being the only profitable but ''imprudent'' investment of UTI.

Lack Of Transparency

Reliance is, of course, just one of the 19 companies the Tarapore committee singled out for treatment, in its bid to figure out whether UTI's decisions to invest in these companies were transparent, appropriate and based on commercial or ''extraneous'' considerations. The analysis pertains to the investment decisions taken between July 1998 and June 2001. The findings make depressing reading. Here's a sampler:

• Debt investments in 12 out of 31 companies have become non-performing assets (NPAs). What's more, 29 of these firms were unlisted, and the rating was below investment grade in many cases. Of the 14 cases rated by the UTI's credit-rating cell, six turned into NPAs.

• Of the equity investments in 84 companies, there has been a depreciation in a number of cases in the first year itself. But the true carnage was witnessed in the year ended June 2001, with investments in companies like Himachal Futuristic, Zee Telefilms, Satyam Computers, and Global Tele-Systems depreciating by as much as Rs 963 crore, Rs 658 crore, Rs 600 crore and Rs 383 crore respectively. ''There does not appear to be any coherent strategy of stop-loss limits or profit-booking,'' notes Tarapore.

• All the investments into 19 companies individually examined are deemed imprudent by the committee, which has recommended that an audit report be commissioned into 18 of them before sending off the case to a pre-investigative body. The committee feels the ''build-up of the portfolio in Zee was not backed by any internal process notes or any delegation of powers to the fund managers....'' In building the VisualSoft portfolio, ''the UTI did not follow any strategy aimed at management of risk.'' ''As for SSI, there were opportunities to exit from the long position with profit, but these were not availed of.'' And in the Reliance investment, ''the UTI took considerable risks in a very large locking in of its funds for a long period.''

It isn't as if all the companies hauled up agree with Tarapore and Co's observations. Vinay Maloo, Chairman of HFCL, for instance, explains that UTI's investment in his company has never exceeded Rs 120 crore, so the opportunity for a Rs 963-crore depreciation-on an investment of Rs 1,051 crore-doesn't exist. ''That figure of Rs 1,051 crore is just an imaginary one,'' says Maloo. Here's what could have happened, he points out: UTI did transfer HFCL shares from one scheme to another, and in the process booked a profit of roughly Rs 900 crore. ''If the diminution of value in one scheme is to be reported, then so should the profit of Rs 900 crore earned by the other scheme that sold the shares. Anyway, that doesn't change the overall investment of UTI in HFCL, which is under Rs 120 crore,'' adds Maloo.

But the part that remains unanswered is: Why didn't UTI book profits at an appropriate time (Maloo says the trust did sell 30 lakh shares, but that's not good enough considering that it was sitting on 1 crore HFCL shares). What's anyway clear from these inter-scheme transfers is that profits of one scheme were being shifted to another, at the cost of unit holders. Indeed, what's alarming is the staggering increase in inter-scheme transfers over the past three years. Between July 1998 and June 2001, Rs 43,334 crore worth of stock was transferred, as compared to just Rs 10,656 crore in the preceding seven years. Even more disturbing is the sharp increase in such transactions over the past three years, with US 64 inter-scheme purchases and sales hitting Rs 20,198 crore by June 2001. To put that figure in perspective, the total investment portfolio of US 64 stood at Rs 22,592 crore by then. According to Tarapore, this spurt in transfers raise concerns ''about the bonafides of such transactions and raises doubts whether this is a case of window-dressing''. For investors, these are chilling statistics as the profits from the schemes they had invested in could have been transferred to prop up some other scheme, since there are no independent asset management companies for the different schemes.

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