The former Chairman of UTI P S Subramanyam is alleged
to have a nexus with the stockbroker Rakesh Mehta and the promoter
of Cyberspace Infosys Ltd, Arvind Johari, the co-accused and the main
beneficiary of the scam. The misappropriation of fund is to an extent
of 32 crores. The CBI is investigating the calls made by P S Subramanyam
to some persons on his mobile phone on 2nd August, 2001. The CBI is
also investigating the link with Jardines, a foreign company.
On a discussion in Parliament Yashwanth Sinha passed the buck to
Manmohan Singh and mentioned that a private placement to the tune
of Rs 1073 crores was made by UTI in a Bombay company in 1994 when
he was the finance minister. This Bombay-based company had an unprecedented
lock-in period of 5 years. When UTI spent Rs 773 crores to buy the
shares of this company (another Rs 300 crores in debentures), the
share price stood at Rs 385. In two years it plummeted to Rs 77.5;
He also revealed to the House that UTI lost Rs 386 crores in 285 companies
between 1964 and 1995. He basically blamed the previous Congress governments
and tried to excuse his ministry from any blame for the risk taken
by UTI in stock market. The opposition protested in Parliament on
21st August 2001 accusing that the Finance Minister misled the Parliament.
However, the truth is that the investments of UTI in stock market
went from 28% to 70% of its total investments between 1992 and 1996.
While the investments by UTI in dubious companies are questioned,
another angle to the ongoing issue with UTI's flagship scheme is that
UTI did not freeze the redemption of units in March 2001 when stock
market fell sharply. A foul play is suspected here wherein "friendly"
/ "select" investors have been intimated about the downfall in the
redemption prices. Major corporate houses like Reliance, Tatas, and
Birlas have redeemed their units worth Rs 4,000 crores at Rs 14.55
per unit (face value Rs 10 per unit) in April and June 2001. Contrast
this with the redemption price offered to small investors now, which
is Rs 10 per unit, that too on their first 3000 units.
Thus, the current crisis in UTI is due to plunging stock market indices,
huge redemption by investors, questionable investments in certain
stocks including those in New Economy Sector and the high returns
UTI traditionally paid to its investors while deploying its large
corpus disproportionately in equities. These factors led to a huge
negative reserve for the country's largest mutual fund, UTI by July
31, 2001.
Current Reserves
of UTI in Different Schemes
n order to appreciate the crisis faced by the country's largest mutual
fund, it is imperative to understand the meaning of the negative reserve.
A negative reserve denotes a decrease in unit capital of a particular
scheme. This translates into a net asset value (NAV) running below
the scheme's par value of Rs 10. NAV is calculated by dividing the
market value of the total assets by the total number of units issued
by the scheme.
As per the financial details announced on July 31, 2001, out of the
67 UTI schemes, 35 schemes logged in a cumulative negative reserve
of Rs 5,186.41 crore during the first six months of 2001. These schemes
had a positive reserve of Rs 496 crores during the corresponding period
in the year 2000. The cumulative reserves all 67 UTI schemes stand
negative at Rs 1850 crores, ended June 30, 2001. In the corresponding
period last year, the cumulative reserve stood positive at Rs 4,164
crores. Thus, a down swing to the tune of Rs 6,014 crores took place
in the last one year. For this period (first half of 2001) UTI had
not disclosed the reserves of its flagship scheme US-64. The Children's
Gift Growth Fund 1986 alone accounts for a massive Rs 1654 crores
of the total negative reserve of Rs 1850 crores.
The Monthly Income Plan (MIP 2000) follows with a comparatively conservative
negative reserve of Rs 336 crores. 15 of the UTI's MIP schemes are
the major losers. 15 of them registering negative reserves, aggregating
a huge negative reserve of Rs 2366 crores at the end of June 2001
against the positive reserves of Rs 684 crores in the previous year.
It is to be recalled here that the market analysis had been warning
UTI against the risks associated with the assured return schemes such
as MIP series. Neither the UTI nor the government took note of such
warnings then. A huge negative reserve of Rs 2366 crores in MIP series
alone is now threatening to snowball into a new controversy. These
are of utmost cautioning value for the UTI. However, these should
not cause panic in general public as the Development Reserve Fund
(DRF) of UTI is supposed to meet any shortfall between the returns
promised and the earnings of a particular scheme. This DRF has a corpus
of around Rs 1200 crores. The botheration for the government is that
even this DRF corpus would drastically fall short of meeting promised
made to retail investors with regard to MIP Series whose negative
reserve stands at Rs 2366 crores. If we compare this DRF corpus with
the cumulative reserves of all 67 UTI schemes, it is still falling
short to meet all gaps between return promised and the earnings of
all its schemes that stands today at Rs 1850 crores.
Next week, let us look at the public reaction, the official version
from UTI on US-64 scheme, the reforms required to revamp the functioning
of the public financial institutions and the investigations initiated
to probe the scam.