Commenting on the Finance Minister singing the innocent child’s tune, one English daily correctly commented: “Clearly Mr. Sinha wants us to believe that the worst crime that he can be accused of is old-fashioned gullibility. Presumably, we ought to be grateful too that he didn’t claim that monitoring the functioning of the UTI was no part of the Finance Ministry’s brief.” This has been the general tone of almost all the proponents of the new age liberalized management of mutual funds in this ‘investor-friendly’ environment of global economics. The only proof Mr. Sinha has to offer of his innocence is even more unbelievable – that the first information of freeze on trading of the US-64 sent to him was through a letter delivered on Saturday evening at the Finance Secretary’s residence. A more appropriate description of this scam was in another editorial comment. It said “The system is tailormade for abuse.”

On the 2nd of July 2001, the UTI came under pressure due to massive fall in the actual market value (UTI shares are traded in the market at a predetermined rate) of its flagship company, the US-64. The management announced a freeze on sale and purchase of its shares for six months, after which it hoped that the value of its shares would rise. This had to be done as “substantial erosion of its Net Asset Value triggered sell off in the last one hour of trading”, said a report on 3rd July. Meanwhile it declared tha it would restructure the investment portfolio in order to work out methods to protect it from the volatile stock market. Ostensibly this had been done to protect the investors and help them redeem the value of their investments which otherwise would turn “negative in the wake of downward trend of its Net Asset Value”.

This move was not expected to affect the liquidity of the scheme as it was ‘listed’ in the wholesale market. However, the panic that set in soon exposed the truth that the UTI was extremely short of funds and did not know from where to pay the next dividend amounting to around Rs. 1300 crores, nor did it have the means to meet its monthly income scheme bills worth more than Rs 400 crores per month. It was estimated to have an immediate requirement of Rs. 5000 plus crores.

What the move effectively did was to prevent common investors, those who had saved every rupee to make a safe investment, from disposing off their shares at the predetermined rate as this would have further depressed the Net Asset Value (NAV) of the US-64 shares. The UTI follows an administered price system. The shares are sold at a pre-determined price as settled by the UTI board. The selling price fixed in May 2000 was Rs. 13.75 each and in June 2001 it was Rs 14.25, and it has earlier been as high as Rs 17.73 per share in 1992.

The UTI was set up by the Govt. as a safe investment avenue for common investors, where they could not afford to invest in the share market and trade in the shares as the risks were too high. Prior to this, private mutual funds were in the business and they often duped the investors e.g., the Morgan Stanley Mutual Fund, amongst others. The UTI was presumed to be safe as firstly it would be directly under Govt. control having been setup by an Act of Parliament.

Secondly it would be such a huge corpus of money that no single/ group of speculators in the market could afford to buy substantial shares in it and manipulate its value. UTI was expected to invest this money into safe avenues which would guarantee good returns. The unspoken understanding was that since the Govt. is supposed to be in the know how of markets, it would use its privileged position to make safe investments.

Smaller part of the Fund was to be invested in equity schemes, i.e., in purchasing shares of industrial houses to provide quick returns to the UTI. Major part of it was to be a debt scheme investment into the capital investments of industry and others to provide for assured returns and act as a stabilizing factor for the Fund. The UTI scheme was thus supposed to maintain a higher debt investment than equity investments which are risky. Prior to the 1998 collapse, the debt-equity ratio of UTI was 33:67. After the bailout package of Rs 3300 crores, much of this money was again invested into the IT equity market to provide for quick returns instead of debt account investments. And to top it all, significant amount of this found itself in the fruitless investments of Ketan Parekh’s (KP) favourites e.g., it invested Rs 18 crores to buy 13% stake of little known Shonkh Technologies owned by KP at a premium of Rs 120 per share and it purchased 1.75 lakh shares of unknown Cyberspace Infosys at the rate of Rs 930 each.

UTI was a big investor in HFCL, Global Telesystems, Zee Telefilms, DSQ Software, Satyam Computers, Aftek Infosys, Ranbaxy and Silverline Technologies – all of which were KP favourites and on all of which the US-64 lost out. The UTI, in 2001, made the same mistakes it had made in 1998. Encouraged by the Govt., it lost its money to speculators and manipulators due to investments which should never have been made. The Chairman sanctioned these investments and the Ministry supervised over this open pilferage of funds.

Small investors, like retiring Govt. employees, small businessmen and those who needed to invest in order to save Income Tax, found the UTI to be a good avenue as it guaranteed a minimum dividend annually or in monthly income schemes and in addition to that the share value of these shares would be fixed at a value higher than the initial purchase price as guaranteed under the scheme. No other saving scheme in banks or post offices gave better returns, specially with the Govt. announcing tax computation benefits on UTI investments. It is noteworthy that, depending on its needs, it is the Govt. which makes a particular scheme more attractive with the help of above mentioned provisions and whenever a scheme fails to give expected returns, which sooner or later they all do, the Govt. comes up with a new scheme. The Post office Saving Schemes, the Indira Vikas Patra, the Kisan Vikas Patra, the National Savings Certificate etc. have all been such schemes.

The most popular fund of the UTI, the US-64, attracted 20 million investors, meaning thereby, that if you count 2 children for each investor on an average (considering that in some cases both husband and wife would have invested), it affected the fate of more than 6 crore people or 6% of India’s population. During its hey days in the mid nineties when it was attracting massive investments, fueled by huge dividend returns, even its forms sold at a premium in the market. The total corpus of the UTI (total number of investors in UTI are 4.1 crores) is between Rs. 60,000 to 75,000 crores, which is 65% of the market share of mutual funds and equals one fourth of the country’s annual budget expenditure. At stake thus, in the US-64, was the fate of almost one fourth of India’s urban population, as all these investments were by the city based people. These constituted almost the entire urban middle class, as the rest of the urban population is too weak to invest. Today the value of these mutual investments stands substantially eroded.

Since the UTI is under govt. control, having been made by an Act of Parliament (of course, Yashwant Sinha would have us believe it is autonomous), it is not accountable to the SEBI and its pre-determined rate of exchange was fixed at Rs. 14.25 each, a value much higher than the market assessment of its NAV.

Normally the SEBI is supposed to keep a check on this and prevent companies from selling at a value higher than the actual value in order to prevent the companies from duping the common investors. It has been highlighted that corporate India has not been shaken by the freeze on sale of US-64. Big companies have been in the knowledge of the impending closure of the fund and of its falling value for the past six months. Due to this; though what they now say is that they used common sense only, they have comfortably sold out their tradeable shares further eroding the NAV of US-64. Reliance, which had Rs 835 crores of shares in UTI schemes (from the UTI equity funds) in March 1995, held just Rs 13 lakhs of shares in March 2001; Telco sold its entire US-64 holding of Rs. 145 crore only recently. Bajaj Auto sold off half of its UTI shares amounting to Rs 1.5 crores only two weeks ago. This erosion in value is now sought to be off-loaded on to the common investors by decreasing the value of the shares now in accordance with the market assessment. It has been calculated that the NAV of US-64 shares today stands only at Rs 6.00 each.

Incidentally this question of prior knowledge is one of the issues to be investigated by the Committee set up to look into this scam with MPs also charging the Govt. with insider trading. In this light comes the declaration that to prevent the losses the UTI will sell in future at its NAV and give up the system of administered prices. ASSOCHAM too has made such a demand along with a host of pro-liberalization economists. This means that the security which the investor was offered at the time when he was encouraged to invest, i.e., of being able to sell at an administered price higher than its purchase price and the assured dividend etc. will go, and this Fund, instead of remaining a safe investment with good returns for the middle classes, will be subject to the vagaries of the market.

In order to save its face, the UTI said it would sell its holdings (its debt account investments in big industries) in some strategic industries in order to build up its cash reserve and improve its liquidity in order to meet its cash requirements. Immediately the industry reacted, as this meant that the investment of UTI in these industries would go into the hands of adversaries or the industries would have to raise that much capital to pay to the UTI in order to safeguard their control over their own industries. The Govt. immediately came to the rescue of the industry by announcing that the Govt. may consider soft loans from banks to the UTI or even a rescue package and that the industry need not panic. This came as a relief to several corporate groups including Reliance, Modi’s, ITC, HLL, Himachal Futuristic and Infosys, amongst others. Actually the debt part of UTI Fund has been used by big industry as a safe source for big capital investment which, being a Govt. controlled fund, would not be manipulated against their own interests.

To check manipulation, the UTI has also announced its intention to follow the Deepak Parekh Committee’s recommendation to allow trading of its shares in the market at the daily NAV. It has not answered why this has not been followed when, during the last crash in 1998, the same recommendation had been made. It has also not answered why big industry was given the privilege to sell their shares in UTI at a higher than NAV price on a large scale for a month before trading was suspended for six months. The recommendation made then also was for investments in fixed income securities (debt part). It was rehabilitated then through a Govt. finance of Rs. 3300 crores which was billed by the Govt. to its expenses, thus indirectly burdening the common man.

The US-64 collapsed essentially because firstly the Govt. had allowed large investments of UTI into special companies which were used by officials and brokers for manipulating funds out of the share market. These included companies belonging to Ketan Parekh as well as those belonging to A.B. Vajpayee sponsored Century Consultants and Investments owned by the infamous Johari brothers of Lucknow. This eroded the value of US-64 shares. It has been estimated that due its holdings in Ketan Parekh sponsored HFCL and Zee Telefilms stocks in March 2001, UTI suffered a loss of Rs. 1638 crores. In the background of its eroding value came the sale of UTI shares on a large scale by the big companies. And lastly came the failing stock market. So long as the stock market was going on well, it had the ability to absorb the Govt.’s manipulation of US-64 Funds. But the moment the market itself started collapsing, the UTI shares collapsed faster than the others and precipitated a crises which the management hoped to curtail with blockage of sale of US-64 for six months. That is why initially they gave the logic that ban on sale will not create a panic as only 25% investors go in for redemption and that once the stock exchange picks up in 6 months UTI shares will become afloat again. They did not answer why should UTI be amongst the first to collapse with the stock exchange crisis, when many of the big corporates which hold UTI investments (from its debt funds) are still afloat? Was the UTI meant to be a cushion for the corporate houses or a security for the common man?

The Govt. is reluctant to announce financial support for UTI, as it fears being questioned about the previous bailout package. There have been demands to immediately open up the sale. But the Govt. is not interested. It wants people to be stuck with the UTI shares and will allow them to sell only when the Govt. has made the necessary legal changes to allow US-64 shares to be sold at their market value.

There is also a proposal to provide soft credit to UTI through banks or the withdrawal from development reserve fund. This caters only to the present cash requirement of the UTI. Some people are for privatizing the entire fund. This implies full freedom for the speculators to fleece at will without accountability.

The other measure is to bring the UTI Fund under SEBI regulation. SEBI has supervised over the entire Ketan Parekh Scam as well as that of Century. What will a regulator under the Finance Minister regulate, when the source of crisis are the head of the Govt. itself?

But the most sinister of all proposals is to split the existing fund into a debt fund called the income fund and an equity fund. The share holder’s holding will be split in the ratio of 30% in the debt fund and its expected NAV shall be Rs. 13 (below the value of Rs. 14.25 last fixed for the whole fund by the UTI) and the rest 70% shall be the equity fund whose market value is expected to be Rs 7. This means that on the total investment, while the corporates have withdrawn at the rate of Rs. 14.25, the common investors’ money will be valued in two parts – 30% at the rate of Rs 13.00 and 70% at the rate of Rs 7.00, and this by Govt. estimates because private assessments value the entire 100% of US-64 shares only at the rate of Rs 6.00. This proposal is again to devalue the peoples’ share.

Can there be a solution within the system? Well, funds are collected by the Govt. to allow it to invest in lucrative projects. We understand lucrative projects to be development and industrial projects which raise the standard of living and purchasing power of the people. But for the Govt. the most lucrative project is to gamble in the stock exchange, manipulate chosen stocks, make common men invest their savings and siphon off the money. The only answer available to the people is to charge the Govt. with criminal manipulation of their savings. The proof is there for all the people to see. But will the courts of India recognize them?