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Dark Diwali looms as UTI crisis acquires new twist

Nikhil Faleiro in Bombay

It came as shock on September 30 when a clash between trustees of the Unit Trust of India and its auditors led to the startling disclosure -- from the fund's newly appointed chairman P S Subramaniam -- that the reserves of the fund's flagship scheme, the Unit Scheme 64, had turned negative by Rs 10.98 billion.

Most of Corporate India was on holiday for the next four days, and rumours flew thick and fast that the mutual fund was bankrupt and that it was up to its neck in debt.

When the country returned to business on October 5, the Bombay Stock Exchange collapsed, and the Sensex which was showing signs of recovery, fell by 224 points to go under the psychological 3000 level mark to close the day at 2878 points.

Within minutes of the crash, finance ministry officials readily suspected a foreign hand and directed the Securities and Exchange Board of India to ascertain if foreign institutional investors were shortselling in a bid to make quick profits.

Says A Manish Shah, vice-president, Gold Crest Securities, ''Rumours were circulating that a large corporate was offloading UTI shares so that UTI would be forced to sell its stock of shares which would then be picked up cheaply.'' True to form, UTI itself turned pro-active, selling gilts worth Rs 5 billion and driving the Sensex up by 41 and 89 points on Tuesday and Wednesday respectively.

Simultaneously, UTI also told some corporates that any offloading of units would be met by offloading their stocks in the market. A threat to corporates, as it were: If you sell my shares, then, well, I will sell yours -- a move with the potential to effect changes in managements.

Says UTI chairman Subramaniam, ''It did come as a shock that we were being targetted, but once we ascertained what was going on we decided to do the same thing ourselves.''

Nervous investors meanwhile raced to the nearest UTI counter to sell and long lines were seen at UTI offices as small investors began to offload their units.

The question on everyone's mind was: Is it time to sell? And the sales spoke about the mood in the market during the first three days of the week. UTI redeemed (or rather investors sold) units worth over Rs 1 billion.

But what led to so much redemption? It was because investors felt cheated. As Anthony Fernandes, a UTI investor who offloaded US 64 units worth over Rs 15,000, says, ''Look at the situation. If they are stupid and offering Rs 14.25 for paper worth Rs 9, why should I let go of the opportunity?''

Anjali Patil, an executive at Lakme Limited, was in the queue to dump 20,000 units which she had been holding for 15 years. ''Why carry paper of doubtful value? Let me turn it into cash now for who knows what will be its worth tomorrow."

And the panic had begun to set in. By Wednesday night finance ministry officials began a full-scale rescue operation, with Finance Secretary Vijay Kelkar announcing that ''the government will stand fully and firmly behind UTI''.

But that did not satisfy the market which dropped again by 112 points on Thursday as there were persistent doubts about the business practices adopted by the leading mutual fund organisation. Doubts because the erosion of US-64 and other UTI schemes in 1996 and 1997 had brought out the fact that the trust was paying out of its reserves, and that there were serious flaws in the manner the funds were being managed.

No doubt the payouts were eating into the scheme's reserves in 1996-97, turning it negative during the next year. Significantly, the scheme's general reserves, in which it used the retained profits of a good year to meet the exigencies of a bad year, dropped from Rs 15.94 billion in June 1994 to Rs 13.67 billion in 1997. This fact, which violates the prudential norms, was brought out in two successive SEBI internal audit reports, but none in the finance ministry apparently took note of it.

It was not without reason though. The uncomfortable fact is: US-64 had burnt its fingers by overdrawing on equities whose prices kept tumbling. As one senior Bank of India official points out: ''When the economy is facing fundamental problems, stock values cannot but fall. It is naive to expect UTI to be insulated from the investment environment.''

Typically, the top holdings of the scheme are mostly heavyweight Sensex scrips -- ONGC, BHEL, BPCL, SAIL, MTNL. And these tend to lean more on the companies in the core and commodities sectors and public sector enterprises. What is more is that most of these companies have performed worse than the Sensex for a long time, leading to a loss of Rs 22.49 billion in value in ten private sector scrips.

Similarly, public sector shares that UTI bagged as part of the disinvestment programme of the Manmohan Singh regime have weighed the scheme down by Rs 20.71 billion with some like the Steel Authority of India Limited and ONGC losing over 50 per cent of their worth in just 12 months.

Former UTI chief Dr S A Dave has put the blame squarely on the manner in which the scheme has been run these last two years. He points a finger at the sharp increase in the share of equities in the scheme's investment portfolio, and that too when the market was on a downslide.

Part of the reason no doubt is political, UTI being the saviour of governments in distress when the markets collapse. The buying operations to save the market and oblige successive governments has cost the UTI investor dearly.

However, if market veterans do not give up hope on UTI, it is because of its gigantic size -- Rs 640 billion in investible funds and stock investment accounting for eight per cent of the BSE's total market capitalisation. Besides, the UTI Act puts the fund within Parliament's monitoring range. As Satish Parekh, a broker for SSKI Securities, says, ''I am confident that as the economy turns around, UTI will recoup the dip in its reserves.''