UTI’s summer 2001 borrowing raises questions on insider trading

Sucheta Dalal

Mumbai, Jan 2: The chairman of the Unit Trust of India, Mr M Damodaran, confirmed to The Financial Express the veracity of a report on Tuesday that UTI had indeed borrowed a whopping Rs 6,500 crore in April-May 2001, in order to meet large redemption demands before its book closure last year.

M Damodaran

This raises serious issues pertaining to insider trading and lack of transparency, revealing yet another dimension of how the then UTI management had fudged facts and misled investors in April-May 2001.
This information seems to have escaped the attention of the Malegam Committee as well as the Tarapore Committee which had been entrusted with the task of studying UTI’s functioning, as it finds no mention in their reports. While the borrowing was cleared by UTI’s board of trustees, they seem to have made no mention of it to the Tarapore Committee.

Mr.Damodaran told The Financial Express that out of the total borrowing of Rs 6,500 crore or so, around Rs 4,000 crore was raised through UTI’s other schemes or as he called it “UTI’s internal liquidity pool” and the remaining Rs 2,450 crore from commercial banks. The State Bank of India (SBI) lent Rs 1,500 crore and others such as ICICI Bank, Union Bank of India, Bank of Baroda (BOB), Bank of India (BOI) and a few others lent UTI Rs 950 crore.

Most interestingly, these very banks figure in the Tarapore Committee report as being among the top 15 institutions that redeemed the maximum units during the April-May 2001 period. SBI redeemed Rs 355 crore worth of units, BOB Rs 150 crore, ICICI Bank Rs 119 crore, BOI Rs 74 crore and Union Bank of India Rs 28 crore.

This means that commercial banks, while lending money to UTI against the collateral of government securities, were at the same time protecting their interests by redeeming their units at the highest rate of Rs 14 in May. Capital market sources contacted by this paper agree that this clearly smacks of insider trading and requires investigation.

However the Tarapore Committee has given these institutions a clean chit on the grounds that media reports and the reduction in the monthly increase in repurchase price of Units “would have flashed amber signals to the informed investor community”. When contacted, Mr Tarapore continued to hold this view and said that redemption by a large number of investors (over 12 lakh investors) does not point to insider trading. Mr Damodaran says that the question of whether or not there was insider trading is being examined by the joint parliamentary committee (JPC).

Surprisingly, media reports pertaining to the drop in the appreciation of unit sale price in May, did not flash amber signals even at the finance ministry. Finance minister Yashwant Sinha has told Parliament that he was unaware of the UTI crisis until July.

If UTI chairman Mr Subramanyam had omitted to inform the government, even though it was bailed out just a couple of years ago to the tune of Rs 3,300 crore, the new revelations raise fresh questions pertaining to finance ministry’s supervision of UTI.

It may also be recalled that even though the Trust had no money to meet its own redemption requirements, it was at the same time attempting to bail out the Calcutta Stock Exchange by acquiring large chunks of DSQ Software shares and causing a further loss to its unit holders.

The Tarapore report has discussed at length how UTI had flouted its own policy guidelines to affect inter-scheme transfers, which had reached staggering levels during Mr Subramanyam’s tenure as chairman. In 2000-01 these amounted to Rs 20,198 crore compared to US-64’s total investment portfolio of Rs 22,592 crore (at end June 2001).

It also mentions that the auditors noted the “negative liquidity in 25 schemes” as being due to inter-scheme dues. Although the Tarapore Committee has expressed concern about the “bonafides of such transactions” and said that they “raise doubts about whether his is a case of window dressing” there is no mention that over Rs 4,000 crore were transferred to meet redemption needs.