Mr.Yogi Aggarwal, columnist of "india-syndicate.com/" further points out in his illuminating articles published online-
"The figure of Rs 5.81 for the net asset value (NAV) of Unit-64 marked a nadir for UTI and revealed to a shocked public just how deep the rot had set in the government run financial sector.
"The facts as revealed by the government appointed Tarapore Committee and the other committees which preceded it show a trail of bungling, structural flaws and UTI officials using public money in an "imprudent" manner to help various controversial and powerful companies in stock exchange dealings that cost the UTI several thousands of crores and severely eroded investor wealth. What they reveal is not just incompetence but a flouting of all prudential norms to favour certain individuals and companies.
"While the Tarapore Committee saw no reason to believe in any "breach of confidentiality" leading to the large scale redemptions in Unit-64 during April and May 2001 when around Rs 5,000 crore was taken out by big corporates and banks from Unit-64, it severely criticized the way the scheme worked. A fundamental flaw was that Unit-64 lived beyond its means, rewarding unitholders with dividends beyond its capabilities and propping up the price of Units well beyond their real worth.
"UTI could keep going because new people were always willing to put their money in Unit-64, thus paying for the dividends and helping hide the real state of affairs. The classic case which comes to mind is that of the Ponzi scam in the west in the early part of the last century, in which investors were promised and paid huge returns by the simple expedient of having new investors come in so that the kitty was always full. so long as the inflow from fresh investors was large enough to pay for the hefty returns promised.
"The Tarapore Committee commented, "The pricing mechanism was clearly faulty and had all the ingredients of a ponzi scheme under which new entrants and those continuing in the scheme had to bear the burden of redemption at relatively high prices." The government run financial sector had clearly failed in its responsibilities by trying to meet up to unrealistic expectations which it had created in the middle class constituency.
"At the same time the government's constant instructions to the UTI to prop up or help this or that business house led to bad investment decisions to the detriment of unitholders. It is noteworthy that matters seem to have worsened from mid-1998 onwards, when the present government took office and when P S Subramanayam was appointed chairman. Inter scheme transfers between different UTI funds were one reason for the drain on Unit-64s resources. These jumped ten times from around Rs 1,000 to Rs 2,000 crore per year in the period preceding to Rs 10,000 to Rs 20,000 crore a year thereafter.
"These transfers were used to prop up other UTI schemes at the cost of the Unit-64. To illustrate consider the following: In December 2000 Unit-64 got Rs 3,333 crore from other UTI schemes for 230 sale transfers. These were reversed the next month but for this the Unit-64 had to shell out Rs 3,447 crore. This paper exercise meant a loss of Rs 116 crore for Unit-64 which went to boost the revenues of other UTI schemes.
"The UTIs decision to offer unitholders of upto 5,000 units the option of reselling their unit back to UTI at a price of Rs 10 in January 2002 rising by 10 paise each month till May 2003 only involves a postponement of a difficult choice. Unless the sensex rises to an unrealistic level of around 7,000 (from the present of approximately 3,400) the NAV of Unit 64 cannot be above Rs 10. Since the government is committed to buying back all units at Rs 10 in May 2003 there would be sharp redemptions at that time. Depending on how the stockmarket behaves estimates of the government's liability to bail out UTI at that time range from Rs 6,000 crore to Rs 8,000 crore.
"What is perhaps most scandalous is the manner in which UTI was used to prop up share prices of certain companies in a dubious manner. The top management consistently ignored the advice of its equity research cell. The Tarapore Committee found that in all 19 cases it picked for examination there were signs of "imprudence". These companies included such as Himachal Futuristic, DSQ Software, Pentamedia Graphics, Ispat Industries, Jindal Vijayanagar, Essar Oil and Essar Steel, and Reliance and Reliance Petro.
"A majority of these deals were through private placement and off-market deals making them less transparent and the value of these deals in the three years to June 2001 was around Rs 18,000 crore. The committee noted, "there are a number of cases where the chairman's powers have been exceeded," and "investments have been made in one company of a group while there was default in another company of the group."
"Further, the UTI invested around Rs 2,500 in the equity of thinly traded or unlisted companies from which it will be very difficult for the UTI to exit. Many of these investments (it's perhaps more accurate to call them "gifts") were made at the behest of the political masters though the Committee does not go into this. In one famous case UTI was used to bail out brokers involved inthe Calcutta Stock Exchange crisis of March 2001 by purchasing 1.3 million shares of DSQ Software for Rs 25.1crore.
[Source:http://www.india-syndicate.com/polit/ya/18jan02.htm]
In the next article we give the recommendations as made by the Deepak Parekh Committee
