Cover story: The Rot in UTI [Pg.2]

[ Contn. ]
The Rot in UTI

Can of Worms

If UTI's investment decisions have been influenced by factors other than sound investing logic, it is nothing new. The institution is a 'government' organisation and continues to make politically-motivated investing decisions. ''UTI is the only place where the portfolio construction isn't decided by a portfolio or fund manager,'' says the manager of a private sector fund.

M.J.PHERWANI
The true big bull, Pherwani used UTI's huge funds to move the markets when he was the chairman (1986-90)

The Deepak Parekh Committee recommended that the asset management function-highly centralised, with decision making being vested at the highest level of management-needed to be changed. True, the UTI chairman has excessive powers when it comes to clearing investment decisions (Up to Rs 50 crore recently; now reduced to Rs 40 crore); the board steps in only if the amount to be invested is at least 5 per cent of the investible surplus.

Arguably, UTI's biggest investing folly in recent times is Arvind Johri's Cyberspace Infosys. It picked up 1.75 lakh shares of the company at a price of Rs 930 (market price then: around Rs 1,100) in a private placement exercise in June, 2000 and there are reports that it had bought into the scrip even before. Today, the scrip is quoting at Rs 11 and questions are being asked about why UTI invested in a NBFC that appended Infosys to its name to benefit from the software boom.

Was the motivation political? Subramanyam's defence is that if the Reserve Bank of India (remember, the company was a NBFC), the Department of Company Affairs, which approved the change of name, and SEBI, which vetted the offer document of the company's private placement found nothing wrong with it, why should anyone expect UTI to? Coincidentally, UTI Securities was the co-lead manager of the issue.

Similar instances abound: like Vinay Rai's ITIL (bought by UTI at Rs 2,000 a share and now quoting at Rs 50). Exacerbating things is the clutch of holdings UTI has in unlisted entertainment and media companies, holdings acquired at prices between Rs 250 and Rs 500 a share. Most of these companies, like Rathikanta Basu's Broadcast Worldwide and Sanjay Khan's Numero Uno International (acquired at Rs 500 a share) seem to have put their IPO-plans on hold, blocking the institution's exit route. This investing strategy has led to UTI's total portfolio swelling to over 2,000 stocks. Not surprisingly, the performance of UTI's funds was below that of some other funds in terms of returns since launch. A sampling: in diversified equity funds, for instance, Alliance Equity's returns since launch was 42.18 per cent; and Birla Advantage's, 19.54 per cent. In contrast, UTI's best-performing fund gave 12.17 per cent. The story is the same in most other fund categories. UTI simply doesn't run the best schemes (See How UTI's Funds Performed).

"There's no cause to panic"
P.S. Subramanyam, Chairman, UTI

Q. ICE-stocks have fallen. Will US-64's NAV fall like it did in 1998?
A. Unlikely. US-64's NAV is still above par.

There's the allegation that UTI mirrored Ketan Parekh's investment decisions...
Every fund was investing in these scrips. They can't invest as much as UTI. We have more funds.

There's a perception that UTI served as an exit route to Parekh for stocks like Zee and HFCL that he wanted to sell...
These perceptions are baseless.

Why has UTI gone overboard with its investments in media and tech stocks?
The Nasscom report said that the technology sector held promise. There was even a separate ministry. We act on the same information that is published. UTI is not immune. It is just one player.

What do you have to say about the Cyberspace Infosys case?
We are as much a victim here.

Is it true that reports by the research cell that are unfavourable are killed?
This is (a) baseless allegation. (But) based on market information, a fund manager may overrule a research-recommendation.

Was the Trust selling family jewels like HLL to buy new economy stocks?
When there is redemption pressure- the fund manager sells. Sometimes stocks are sold in the normal process of booking profits.

Do investors in UTI's schemes need to be worried?
Absolutely not. What is happening now is a temporary aberration.

So, what does UTI base its investment decisions on? Research? The institution does have a research cell created by Dr S.A. Dave, an academically inclined economist. But apart from Subramanyam, who makes an appearance now and then, none of the other fund managers attends the routine 9.30 a.m analyst briefing. Worse, there have been several instances of research reports that aren't kind to specific companies being overruled. Shonkh Technologies was one such company, and the analyst who filed the report was transferred to a less critical function in the back office.

To attract the better equity analysts UTI will have to radically alter its Raj-type salary packages. At UTI, an analyst with a couple of years experience earns Rs 1.2 lakh a year; his counterparts in other firms earn about Rs 50 lakh.

The debt-strategy of the institution is similar to its equity-one: part of the portfolio is made up of Non Convertible Debentures of old economy companies into stell and textiles and a considerable portion of this is, to put it mildly, junk; worse, there is riskier new economy debt, like the amount lent to HFCL.

Finally, doubts about UTI's flagship fund US-64 persist even as the Trust continues to increase the sale and repurchase price of these units every month. The fund's exposure to ICE-stocks in December 1999 was 21.6 per cent; this came down to 16.50 a year later. By then, the market value of US-64 investments were Rs 17,302 crore. Now, following the bloodbath on the market and the funds composition, it may have dipped further. ''NAV above par as of now,'' is all Subramanyam will say.

Still, the investing community seems to have had some suspicion of the malaise at UTI. In the period between April 2000 and February 2001, net inflows into the Trust were a mere Rs 106 crore as compared to Rs 4,538 crore in 1999-2000. At one level, that renders several things irrelevant. Like whether UTI changes its ways or the Government decides to look into the institution's behaviour. The market has spoken.

1 2

Issue Contents Write to us Subscription Syndication