The Hindu Business Line : Huge bailout for UTI

AS THE dimensions of the bailout package for the Unit Trust of India become clearer by the day, the most surprising aspect is that so few questions are being asked about the crisis that has unfolded over the last five years. There also is no attempt to fix accountability for what has happened.

It is almost as if the Government just wants to get the whole thing off its chest by providing support in different forms.

Just take a look at the bailout bill that is emerging from the closet: it is around Rs 20,000 crore for all the UTI's assured return schemes, including the Monthly Income Plans and US-64.

Throw in the Rs 3,300-crore special package of 1999, and the bill totals to around Rs 24,000 crore. The UTI's assets under management in the last five years were Rs 50,000-55,000 crore. So the shortfall is 44-48 per cent of assets.

The sheer magnitude of the shortfall points not only to mismanagement over the years — especially in the 1990s — and poor structuring of schemes without much thought for the implications.

The UTI's focus was on fund mobilisation with performance almost as a secondary issue.

It is doubtful if there are other instances of such huge bailouts without an attempt to fix accountability. No doubt there have been numerous committees to look at what went wrong and what can be done to repair the damage to the extent possible. But none went into the issue of fixing responsibility for the huge gap between performance and assured returns.

Even the set of basic measures that the Deepak Parekh Committee recommended for US-64 was not implemented in time.

Having dished out a Rs 3,300-crore bailout package in 1999, the least one would have expected is for a closer scrutiny of its operations, either by the Government or by an overseeing body created for this purpose.

The UTI was allowed to pursue a populist approach in US-64; it also took advantage of the tax breaks that made US-64 an attractive option for individuals and corporate entities in the 20 per cent and 30 per cent tax bracket; it also went ahead with new assured return schemes (most of them came after the 1998 crisis) with promises that would have been difficult to meet at the best of times.

There may be a view that an exercise in fixing accountability may just turn out to be a case of going over issues whose details are well known by now. But knowing the facets of operations and fixing accountability are two different questions.

The latter may serve as an exemplary action and also provide pointers to how the government and regulatory authorities should be on guard to avoid such pitfalls in the future.

And last but not least, taxpayers who are going to foot this bill over a period of time deserve to know that no institution and its top management can get away with such gross mismanagement.

A few areas where the government could act, even now, to fix some sense of accountability are:

A detailed inquiry should be undertaken into the role in the unfolding crisis of the UTI top management over the past decade (save for Mr M. Damodaran, who took over in July 2001).

long list of critical aspects need to be examined, especially the positioning of US-64, the shifting of positions in the mid-1990s, which allowed huge corporate flows from time to time, and the issue of how a scheme with an equity-oriented portfolio can have a policy of rising dividends or even stable dividends year after year.

Another key issue that needs to be addressed is the non-recognition of the signs of trouble evident in US-64 as early as 1994.

The wisdom of structuring assured return schemes that could invest up to 30 per cent in equities — and which, in general, invested anywhere between 10 per cent and 27 per cent — needs to be questioned.

Last but not the least, tax-payers need to be told why the UTI needs the bailout at all. The move is not really going to help restore investor confidence in the UTI — investors want performance-based returns, not bailout-linked ones, which are a high-risk proposition. Nobody ever invests in the expectation of a bailout.

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