Much Needs to Change, But Will It

ANY danger of a run on the Unit Trust of India, or more specifically its Unit Scheme-64, must, of course, be firmly scotched. So one can perhaps understand the steady stream of reports which have been appearing in the press, not without some encouragement from official quarters surely, of proposals to extend government support to the UTI in different forms. Apart from assurances of financial support all the way from the RBI to the financial institutions and commercial banks, the reports have suggested that the government has under its active consideration tax exemption for US-64 dividend, guarantee of 20 per cent dividend on Units, guarantee of the US-64 corpus and so on and so forth. It is to be fervently hoped that these so-called proposals are just confidence-restoring ploys and nothing more. For special treatment is the last thing the UTI and its present predicament call for. For one thing, as the UTI's experience clearly shows, the other side of favoured treatment is greater government intervention and control which, to mention just one consequence, have been responsible for investment in equity gaining a weightage in the US-64 portfolio which, everyone now suddenly acknowledges, is grossly disproportionate for an income fund. That is the tribute the UTI has had to pay to the ambition of successive governments in Delhi to buoy up the stock market. Nor has favoured tax treatment, which US-64 has received in generous measure in the past, necessarily worked in the interest of the Unitholders always. In fact some tax favours have over a period worked to warp the very character of the scheme. One such, for instance, encouraged massive investment in US-64 by companies and business organisations, which was altogether contrary to the whole purpose of the scheme and, as a former chairman of the UTI has now revealed, was responsible for distorting the investment of the scheme's funds in favour of equity when, around 1995, tightening of liquidity by the Reserve Bank led to redemption of Units to the tune of some Rs 10,000 crore by corporate holders, forcing the US-64 managers to sell off a large chunk of their investment in debt instruments to meet the redemption pressure. But all that apart, the truth is that as the oldest and by far the largest mutual fund and one which, besides, enjoys unique investor- confidence because of its public ownership, the US-64 has no case whatsoever for special tax favours not available to other similar funds. The situation, howsoever parlous, in which the UTI finds itself today in no way alters that fact. Special treatment, as noted above, has been the UTI's bane, but those in charge of it naturally do not see it that way. A variety of contrived arguments are now being advanced by them why the UTI must not be made to move in the direction of disclosing the net asset value (NAV) of US-64 when, in fact, the only valid reason for not doing so immediately is that by comparison with the wholly artificial and inflated sale and repurchase prices of the units, the actual NAV if disclosed cannot but cause a crisis of confidence far worse than anything witnessed so far which must, of course, be avoided. But there can be no question that the sale and repurchase prices must be firmly brought down to earth, albeit in a soft landing over a period of time, and must in due course reflect the value of the fund's assets. This has to be part of a larger process of stripping the operation of US-64 of the multiple layers of opacity in which it has all along been shrouded, a flavour of which was provided by a recent report in the Business Standard which disclosed how the UTI management has been using US-64 to "absorb shocks" in the UTI's other schemes in the falling stock market. According to an anonymous source quoted in the report; "We have witnessed in the past that fund managers at UTI have always banked on US-64 to absorb any redemption pressures on other schemes. It did happen when there was huge redemption on UTI Mastergain and India Fund at the same time. It was at this stage that UTI went for an inter-scheme transfer where US-64 absorbed the stock sold by these two schemes," Transparency as an expression may have been devalued somewhat by its over- use recently, but the above account does provide a peep into the dangers of leaving things to the mysterious workings of an exclusive priesthood- Much clearly needs to change, but will it? It is difficult to be even modestly optimistic after reading what the newspapers had to report about the del iberations at the meeting of parliament's joint consultative committee on finance in Delhi last week which, understandably, devoted much of its time and attention to developments connected with the UTI and US-64. The meeting was apparently marked by a show of solidarity by the representatives of the people, cutting across party lines, in expressing concern over the reported efforts of a bear cartel to depress the value of US-64 and promising the government full support in any effort to beat back what everyone evidently agreed was a conspiracy. The role of some foreign financial institutions apparently came in for special attention with the MPs demanding that anyone found guilty should not be spared, For his part the finance minister duly assured the members that the government had taken a serious view of the matter and would take tough measures to protect the interests of investors. What hope, after such wisdom?