JPC Pushes UTI Privatisation Agenda

S K Mishra

THE Joint Parliamentary Committee probing the stock scam in 2001 has attempted to push UTI privatisation by fixing the responsibility for the UTI mess on IDBI, LIC and SBI which are currently UTI’s trustees. Blaming these financial institutions for showing extreme irresponsibility on certain management issues of UTI, the JPC has recommended strategic sale of 60 per cent stake of country’s biggest mutual fund to a private player within a year.

In its draft report (leaked in parts), the JPC on last year’s market crash observed, “the ministry of finance is squarely responsible for changing the structure of UTI despite  its own views to this effect in 1995 and the reports of various other committees. UTI needs to be completely restructured for which UTI Act should be repealed.” This recommendation of the JPC fits nicely in the game plan of international finance capital.

The UTI was set up in 1963 with the objective of mobilising the savings of the community, particularly small savers. Although it floated more than 75 schemes, its flagship scheme has been US-64. Technically it was a scheme to channel public savings into non-deposit instruments like equity, corporate debt. However to instill confidence in investing public the UTI decided to follow the strategy of ‘trend line repurchase price’. This was possible because the equity-debt ratio in US-64 was quite low until the process of liberalisation began in the early 1990s. The policy changed drastically in the liberalisation phase without any warning to unsuspecting unit holders. In order to support corporates, the UTI started investing more and more into equities turning the ensured income oriented scheme into a high risk equity oriented scheme. This would be clear from the fact that equity-debt ratio in US-64 rose from 28:72 in 1991-92 to 64:36 in 1997-98. Oblivious of the fact that stock market crash is inevitable in casino capitalism, the UTI persisted with the policy of making heavy investment in shares. Hence when share prices plummeted between June 30,1994 and June 30 1998, the NAV of US-64 fell to less than Rs 10 and the reserves stood at minus Rs 1,098 crore in June 1998. The UTI in this period adopted a cavalier attitude while making investment in the shares of non-listed companies. It did not hesitate to buy shares for which there were no takers in the share market. Meanwhile the negative reserves of US-64 kept on increasing and were as large as Rs 2,597 crore on December 31, 1998.

The government of India though lacking sympathy for the small depositor had not bargained for total collapse of the UTI. It thus appointed an Expert Committee under the chairmanship of Deepak Parekh to make recommendations to restore investor confidence. The committee made a  number of recommendations, which included suggestion for converting US-64 into a NAV driven scheme over a three year period and fiscal incentives to investors in US-64. The Deepak Parekh committee also considered the initial capital of Rs 5 crore to be grossly inadequate. The UTI, therefore, asked its sponsors to bring at least Rs 500 crore in permanent capital in the form of subscription to the initial unit capital of US-64. The initial contributors responded positively and contributed Rs 500 crore during 1999. Moreover, in order to bail out US-64 a corpus of Rs 3000 crore was provided to the UTI.

In July 2001, that is, in less than three years since the US-64 scam of 1998 the scheme was back of square one with positive reserves turning negative once again due to heavy investments in highly volatile IT stocks and dismal state of equity market. But it remains unexplained why UTI invested large sums through private placements in the shares of companies which do not even exist. Due to the second mess, US-64 price touched a low of Rs 8.25 on National Stock Exchange on July 23, 2001 and 20 million small subscribers to the scheme suffered heavy losses. Most of the corporates and the bigwigs having already withdrawn their money, it is only the small investors who are actually left as the ‘only’ investors in US-64. The UTI is currently facing a short-fall in a number of schemes and its corpus has continued to shrink over the past one year.

The JPC, having gone into the mal-functioning of the UTI during the liberalisation  phase has interestingly blamed IDBI and other financial trustees of UTI for the wrong reasons. The current malaise in UTI is not particularly due to its decision to participate in banking and lending activities. The heavy losses which the UTI has suffered over the years are mainly due to its indiscreet policy of supporting the corporate sector. Perhaps the UTI had no choice but to make heavy investments in shares on account of obvious pro-corporate sector policy of the central government. In this exercise the UTI simply ignored the interests of small investors who are mostly risk averters. These small investors had hoped to receive an ensured return on their investments. Now it seems that they have lost their principal as well. But this is not the concern of the JPC.

From the draft report of the JPC, it is absolutely clear that its main concern is to push UTI’s privatisation which in essence means handing over small investors money to some private player.

It is intriguing that the draft JPC report makes no mention of the role of the former finance minister, Yashwant Sinha, the man many people hold responsible for the stock market crash in 2001. According to the draft JPC report, Sinha was kept in dark by the then finance secretary, Ajit Kumar who did not inform him promptly about UTI’s decision to suspend repurchase of units. It seems that the JPC members are more than kind to a fellow politician and less than fair to a civil servant. They have probably overlooked the fact that the UTI’s problems began with the government’s attempt to sustain corporate activity through private placement of the UTI funds in gigantic proportions while the Indian capital market remained in a moribund state due to industrial recession. For the last couple of years, while the Indian capital market has been able to raise hardly Rs 5000-6000 crore per year, the private placements of the UTI has been as large as Rs 50,000-60,000 crore. No person other than the finance minister is to be blamed for such a disastrous policy.