As the Unit Trust of India's role in the market mayhem comes under scrutiny, questions about its market clout, broker-links, and chairman's conduct surface.

By Roshni Jayakar

That UTI Chief P.S.Subramanyam is on more than talking terms with Ketan Parekh and Vinay Maloo is well-known

In the second week of April 2001, Unit Trust of India (UTI) Chairman P.S. Subramanyam flew down to Delhi for a meeting with his chief executive, Union Finance Minister Yashwant Sinha, at his North Block office.

Details of what transpired at the meeting aren't available but it is likely that the subject had something to do with rogue-bull, broker Ketan Parekh, and the sway he seems to have exercised over UTI and Subramanyam, or at the least, over their investment decisions. Subramanyam may dismiss the meeting as routine but there's no denying the fact that something is amiss at The Unit Trust of India.

There's a rot in UTI, and it's not just about the institution mirroring Parekh's behaviour. You won't get a whiff of the decay at its swank New Marine Lines offices in Mumbai's central business district, but track the market moves of the Trust, flip through its analysts' research reports, dissect its portfolio, and the signs of malignancy are very much there. For any market operator, problems of this nature would have been worrying. In UTI, a Janus-faced financial institution that doubles up as the largest (and oldest) asset management company of them all, it could be disastrous.

Picture this for size: on February 28, 2001, the funds under UTI's management were of the magnitude of Rs 64, 250 crore; assuming the Trust invests 60 per cent of this in equity, that's 7.7 per cent of the total market capitalisation of the Bombay Stock Exchange. In terms of sheer clout, that's impressive. All other mutual funds together manage a total fund corpus just under Rs 38,000 crore. Purely to put these numbers in the right perspective, one of the largest funds operating on the NASDAQ (market capitalisation: around $5 trillion) Fidelity, manages $ 595.4 billion, a ratio of 10 per cent.

UTI has never hesitated to use that power to sway market sentiment, sometimes of its own accord, and sometimes at the behest of the GoI. There's nothing wrong with that, especially if the GoI's motivation is to insure the stockmarket against speculative-activity driven volatility. Nor is it a crime to move the markets. The epithet 'big bull' was, after all, made to order for UTI's former chairman, the now deceased Manohar J. Pherwani in the late1980s and early 1990s. Pherwani turned UTI into a stockmarket powerhouse in the years he was at the helm (1986-1990).

Still, it seems strange that a market player with UTI's clout had to follow Ketan Parekh's lead into companies in the Infotech, Communication, and Entertainment (ICE) domain; that it has chosen to sell its holdings in old economy favourites like Nestle and HLL that were acquired at bargain prices; that its debt portfolio is riddled with instruments that could so easily turn out to be duds; that it holds equity, acquired at a cost, in unlisted media and entertainment companies that do not stand a chance of listing anytime soon; that the quality of its in-house research has been more an endorsement of the management's investing logic than anything else... And the list could go on.

Tangoing with the wild bunch

The coincidence, if it is one, is striking. HFCL, Zee Telefilms, DSQ Software, Aftek Infosys, Ranbaxy, Satyam Computers, and Global Tele Systems are conspicuous holdings in UTI's portfolio of 2,000-plus scrips. The companies, for the benefit of the uninitiated, are part of k10 the ten scrips Parekh ramped up to exaggerated highs. Today, the institution is left with almost 101 lakh shares of HFCL, quoting at Rs 79, 97 per cent off their peak price of Rs 2,553. Market-buzz has it that UTI mopped up HFCL stock even at this price, but the Trust claims that the average holding price of the scrip is around Rs 105 and that it has booked Rs 950 crore profit on it. UTI's 1998 portfolio does show 98 lakh shares of HFCL and the bull run on the scrip didn't start till well after.

Subramanyam's defence, which starts off with the argument that Ketan Parekh is not even a broker through whom UTI operates, is almost academic in flavour. ''The perception (of a link with KP) exists because the media says there is something called K10. UTI looks at each company's worth in terms of perception, business model, and research reports and puts it all together. These scrips were moving fast, every other mutual fund was investing in them, (and so did we).''

But while major funds have got out of the HFCL scrip altogether, UTI continues to hold on to the shares. Worse, as recently as March, when it was clear to most people that HFCL wasn't exactly going somewhere, the institution lent the company Rs 50 crore by the NCD (Non Convertible Debentures) route. That Subramanyam is on more-than-talking-terms with HFCL's Vinay Maloo and Parekh is well known in market circles. And that isn't just based on the fact that the trio was seen hobnobbing at the HFCL-Channel 9 launch party at Mumbai's Hotel Regent last year.

Look beyond HFCL, but only as far as exhibit 2, Zee Telefilms. Reports have it that UTI was buying the scrip at Rs 400-500 early this year when almost every other analyst had put out a 'sell' recommendation. The institution's executive director M.M. Kapur rubbishes allegations that it did so to provide an exit route to Parekh. ''When money flows into an index fund or entertainment fund, we have to buy the scrip, irrespective of whether it is (quoting) at Rs 1,500 or Rs 70''. That could explain why the average cost of UTI's holding in Zee works out to around Rs 560 a share, while the company's market price, as this article went to press, was below 100 and still southbound.

UTI's indiscretions-if they are that-extend to smaller scrips as well. And, coincidentally, several of these are of tech- and media- companies in which Parekh was interested. One such company is Sriven Multitech. In early 2000, when the promoter of the Hyderabad-based multi-media company (sales: Rs 3.48 crore) needed money, he sold a 10 per cent stake in the company (at par) to Parekh for Rs 1 crore.

S.A.DAVE During his tenure (1990-1995) as UTI's Chairman, DAVE created the research cell, that's now ignored

By July, the broker had ramped up the share price to around Rs 450. Then, he bailed out, making a cool Rs 40-odd crore in the process. The buyer at this price? UTI. Today, the scrip quotes at an abysmal Rs 8.15. Sriven is just one instance; some stockmarket operators believe UTI bought over Parekh's holdings in several such companies. And both Parekh and UTI are believed to be major stakeholders in the Bangalore-based Shonkh Technologies. These shares were picked up for Rs 130 each in a private placement drive. Kapur insists UTI has sold most of the holding in Shonkh. If so, this is one case where UTI got on the bus, and off it at the right time.

The Trust is silent about its rationale for buying into unlisted scrips (through private placement) that leaves it without an exit route. Ironically, in 1998, UTI's exposure to new economy stocks was minimal and the Deepak Parekh Committee actually recommended that the fund try and remedy that. Now, the institution seems to have swung to the other extreme. UTI says its exposure to the infotech sector is a mere Rs 5,300 crore, down from Rs 8,800 crore in December 2000, and Subramanyam feels there is no need to panic: ''What's happening now (in the stockmarket) is a temporary aberration, and we shouldn't overreact.'' Then he gets aggressive. Didn't Nasscom (the National Association of Software and Service Companies) and McKinsey go to town about how software exports would touch $80 billion? Didn't the media waste reams of copy on tech companies? "UTI has to act on the same information; only, we have a larger kitty."

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