UTI doled out some pricey favours

Now, punish the culprits for their outrageous investment decisions

Sucheta Dalal

The Tarapore Committee, set up to review the functioning of the Unit Trust of India, meticulously documents and classifies, without fear or favour, UTI’s many decisions that led to the recent spectacular collapse. But, its report suffers from the absence of inputs from a sharp fund manager or market intermediary, failing to link, therefore, the timing of various investments to specific market developments. Those links could have established UTI’s nexus with speculators and promoters in providing them funds and exit routes as they ramped up shady stocks to dizzy heights.

But even without such an analysis, the outrageousness of some of the Trust’s investment decisions makes one wonder why the government is dragging its feet over enforcement action against its top brass. The Tarapore report establishes that UTI’s former chairman was hardly a scapegoat — he has certainly abused his fiduciary responsibilities. The US-64 scheme has a clear mandate which specifically “prohibited from working for aims other than the benefit of unit holders,” (the 1994 Social Audit Committee headed by Justice M H Kania). But all the cases documented by the Tarapore Committee point to accommodation of shady industrialists and collusive nexus with brokers. That it happened soon after the 1998 collapse needs an uncompromising investigation.

Even the small speculator is aware of the importance of market capitalisation and liquidity in investment decisions of mutual funds. Investment in illiquid, unlisted and defaulting companies puts a fund at risk and makes it answerable to compliance officials and investors. India’s largest mutual fund ought to have been even more conscious about these investment restrictions but the Tarapore Committee shows otherwise.

The most reprehensible investments are those in defaulting companies or those already classified as non-performing assets. These investments brazenly jeopardise investors’ funds and probably warrant a criminal investigation. Such investments, which include Essar Oil, Malavika Steel and Usha Ispat, Parag Bosimi Synthetics, Punjab Wireless Systems, SIV Industries, SJK Steel Corporation, and SVC Superchem, had gobbled up Rs 158 crore in the last two years. The beleaguered Malavika Steel was gifted a Rs 71 crore investment, its defaulting group company Usha Ispat got Rs 12 crore and Essar Oil pocketed Rs 56 crore. Parag Bosimi is a company for which the finance ministry had tried to arm-twist bankers into releasing fresh funds; UTI was the first to oblige. Elbee Services, Essar Steel, Jenson and Nicholson, Jindal Vijayanagar Steel and Ganesh Benzoplast seem clear cases of evergreening since they were already defaulters.
Similarly, defaults in some investments did not stop the Trust from lending to other group companies such as Gayatri Projects, Hanuman Tea, Jyoti Structures, Rama Industries and Rama Phosphates, DSQ Software and Sterling Tea.

UTI’s penchant for investing in Ketan Parekh’s favourite stocks is already well documented and so is the depreciation in their values. However, some investments were made in February-April 2001 only to bail out Parekh. This money was immediately transferred to the broker’s investment companies and is now shown as a loss in UTI’s books. A Rs 50 crore investment in HFCL’s non-convertible debentures in March 2001 was one such deal. Last week, UTI and other institutions blocked HFCL’s attempt to pay out a 25 per cent dividend for FY 2000-01.

Although the institutions’ current tough stand is well warranted, it raises other questions. Why were the institutions silent when HFCL’s subsidiary HFCL Trade-Invest acquired a 28.5 per cent stake in AB Corp Ltd for Rs 165 crore last week? This deal with Ketan Parekh’s Classic Credit is clearly part of a settlement but nobody has questioned the high price. Similarly, no objection was raised when HFCL acquired the public sector Hindustan Teleprinters Ltd for Rs 55 crore in October. Or, its plan to allot 10 million convertible warrants to the promoters through a preferential offer at Rs 92 per share. In the circumstance, blocking the dividend only hurts HFCL’s other investors. A Rs 50 crore investment in NCDs of Kopran Industries sanctioned on February 27, 2001 was a similar deal. Sources say that it was a back-to-back transaction meant to transfer money to Ketan Parekh.
Sebi’s investigation has already documented Kopran’s Rs 78 crore loan to Parekh and UTI’s investment has already turned into an NPA. This means that unit holders have paid for Subramanyam’s gifts to KP and his businessmen cronies. It also makes a mockery of Parekh’s claim that he is a victim of circumstances.

UTI’s investments in dotcoms, IPOs and unlisted companies also form a pattern. They seem to favour policy makers, the media and the glitterati of the entertainment industry and may have been part of an elaborate PR policy (similar to KP’s) which ensured glowing coverage for P Subramanyam. Many of these investments were against the advice of UTI’s equity research cell. Zee Telefilms, where UTI invested Rs 837 crore, was the biggest; it has depreciated 78 per cent. UTI invested in Midday Multimedia despite its research cell’s recommendation to avoid the stock (it has depreciated 60 per cent); it gave Rs 15 crore to Business India in December 1999, which has turned into a default. Similarly, UTI bought shares in Pritish Nandy Communications through a private placement at Rs 300 a share six months before the IPO, and twice that number during the IPO which was made at Rs 155. The shares were quoted at Rs 36.25 on Friday.
If the present UTI management is sincere about protecting investors’ interest and preventing a recurrence of such sordid tales, it needs to start criminal investigations against the culprits and initiate tough recovery actions. Wish the Tarapore Committee had strongly directed these steps, after unearthing so much of muck.

Writer’s e-mail: suchetadalal@yahoo.com