Scam Report

Updated: Dec 23 2002, 05:30am hrs
A day after the Joint Parliamentary Committee (JPC) tabled its report on Scam 2001, it made a correction. The JPC chairman told this paper that Union finance secretary Ajit Kumar was named in the report by mistake. This ends the only flutter caused by the JPCs report and leaves a mere collation of findings from the reports by the Malegam and Tarapore committees and a pointless narration of events leading up to the freezing of sale and repurchase of US-64 units in July 2001. Pointless, because the JPC has ignored the political dimension to the Unit Trust of India (UTI) scandal. It seems to have forgotten George Fernandess famous assertion that P Subramanyam was appointed as chairman at the behest of Tamilnadus chief minister. There also seems to have been collective amnesia about the threat made by Mr Subramanyams lawyer to expose powerful politicians when he was arrested in the Cyberspace Infosys case. Therefore, any attempt to pin responsibility for UTIs collapse without examining the role of politicians is irrelevant.

However, if Mr Subramanyam had disclosed UTIs precarious finances to the finance ministry in April 2001, it could have contained the damage. Instead, he borrowed Rs 2,438 crore from the State Bank of India (SBI), Bank of Baroda, Union Bank of India, ICICI Bank, Syndicate Bank and others. All of these used their inside information to redeem their entire holding of units in April and May at the artificial administered price of Rs 14.75. However, the JPC has refused to label these as inside deals even though SBI and ICICI had nominees on UTIs board of trustees. It merely expresses discomfort at the fact that SBI had redeemed the maximum number of units before the July debacle. Having made several general observations (dating back to 1993) about the finance ministrys failure to make UTI compliant with the Securities and Exchange Board of Indias mutual fund regulations, the JPC makes a bizarre recommendation that is based on the Tarapore committees report. It has said that the Committee are astonished to find that statutory auditors are not required to comment on the quality of investment decisions and that these decisions are also not subject to any subsequent scrutiny. The Committee urge that this be done forthwith. This shocking suggestion only reflects complete ignorance about the capital market on the part of the Tarapore committee and the JPC. The implication is that statutory auditors with no knowledge or expertise in fund management would second-guess and question investment decisions. This would only spell the end of the fund management business. One of the few sensible recommendations of the JPC is its insistence that the sponsors of UTI-II cannot run their own mutual funds and create a conflict of interest with UTI. Since UTIs sponsors are all government banks and institutions, it is possible to have them merge all their mutual funds into UTI-II and then bring in a strategic investor who would run it independently and away from government influence.