UTI64 bonds mature today ie on 31st March and the investors have time of one month to surrender their bond ledgers to UTI offices in one months time.
UTI64 bond redemption is an end of an era and a significant event in the Investment Culture in India. UTI 64 signified, for many citizens as the gateway to the Investment world of Stocks and Bonds.There was a time before Dhirubahi when people praised UTI for being a rock solid investment destination that helped them in difficult times.
The end of UTI64 signifies how a perfectly good institution can rot and decay with sufficient political interference, lack of transparency and sheer lack of collective responsibility of the Trustees and Politicians.
From an Ex SEBI Chairman Mr Dave who headed UTI to another M Damodaran, who went on to head SEBI here is the tale of how a good institution fell victim to interference and price fixing finally destroying a lot of investors wealth and more importantly confidence.
Unit Trust of India was set up by an Act of Parliament in 1963, and in 1964, US 64 was started through a special legislation, to pool in small investor resources by the then PM of the Janata party govt under Mr Morarji Desai.
The contributors to the initial capital of Rs. 5 crore for US-64 Scheme were Reserve Bank of India (RBI), Other Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) & its subsidiaries and other scheduled banks including a few foreign banks. In February 1976, RBI’s contribution was taken up by the Industrial Development Bank of India (IDBI). The institutions were provided representation on the Board of the Trustees of UTI. Under the provisions of the Act, Chairman of the Board was appointed by Government of India. The Board of Trustees oversees the general direction and management of the affairs and business of UTI. The Board performs its functions based on commercial principles, supposedly keeping in mind the interest of the unit holders under various schemes. Since its inception, an official of the rank of joint secretary or higher at the finance ministry has represented the Government of India on UTI’s board of trustees.
The fund performed very well in the initial years till the 80s, when there was heavy intervention in the markets by the government and MCA in Corporate affairs and IPO pricing was fixed by a Controller. At the end of 1988 UTI had Rs.6,700 Crores of assets under management.
Remember the unwritten word was US64 = 64 % DEBT + 36% EQUITY.
Although analysts considered the two chairmen, G.S. Patel (1977-83) and M.J. Pherwani (1984-90) to be market-savvy (The latter even came to be known as a “bull” and was considered very good ), they had kept US-64, a balanced fund.
It was under S.A. Dave (1991-96), a career development banker and former Chairman of the regulatory body, the Securities Exchange Board of India (SEBI), that US-64’s investments became tilted heavily in favour of equity (70:30). Cracks started to appear in the early 90s with Pherwani s death (suicide) post the Harshad Mehta scam, which was the first big scam to hit the stock markets. Big corporate names were involved both local and foreign, and who can forget the Suitcase that was allegedly given by Mehta to the then PM P V Narasimha Rao ?
Read The Scam by Sucheta and Debanshu for some detailed analysis.
Under the stewardship of Dave, and from my personal experience as a long term UTI investor, the organisation and the service of the UTI went literally to the dogs as many investors had to face hell as dividend warrants never reached investors, dividend warrants of A being mailed to B (my dad received some ones 30+thousand div warrant which he hand delivered). Then there was the certificate mess after the rights issues and bonus issue and service was at best pathetic. Even the officer level staff was more concerned about the inalsa toasters they got thanks to UTI investing in that company than servicing customer requests. (this from personal experience).
I still vividly remember in 1995 fresh into college after my fathers demise, being given the runaround by different sections after not receiving dividend close to a lakh of rupees for 6 mths, i marched into his office and had a major argument with the then MD at IDBI tower 29th floor, about my predicament, the state of UTI and its survival and growth due to the supposed 24% dividend. I had predicted that UTI wont survive if it stopped that dividend. The man sitting in one of the plushest offices in the most expensive real estate in Mumbai, could not digest being pulled up by a 18 yr old ‘boy’, but in his defense i received the chq in 5 days time. In hindsight, I was so right!
It was the beginning of the decline. In 1994, the UTI board — in a highly controversial decision — invested more than Rs 1,000 crore (Rs 10 billion) in Reliance Industries Limited shares through an off-market private placement. The shares were purchased at rates that were above the prevailing market prices and would be ‘locked in’ for a period of five years.The Finance minister 1991 to 1996 was none other than the current PM.
In the mid-1990s, US-64 dipped into its reserves to fund dividend payments. The US-64 scheme purchased substantial amounts of PSU shares, and naturally, for a purpose. The bailout of US-64 in 1998 was largely on account of reduced valuation of PSU stock which were bought by the UTI during the disinvestment process between 1991 and 1995. Source Rajya sabha debates.
Now US 64 was no ordinary fund it was almost the market, people preferred it as a better, more reliable alternative to the stock market. Infact, at one time, such was its power that in Shahrukh terms UTI was the biggest gunda in the Markets and UTI could make and break share prices if it so choose. For gods sake even the market hating Communists invested into its units and lost money in the downfall. People never bothered that UTI 64 WAS A TRUST FUND not a MUTUAL FUND. There was no transparency in its dealings, the NAV or fund policy was never disclosed, and everything was administered at the UTI tower in New Marine Lines, including the Sale and Repurchase price. You were always at the mercy of the Trustees in the UTI Board for vital decisions and returns. They were never directly accountable to the unit holders or anyone except to their political masters who didn’t bother until there was a big market crash or if they had to favor some industrialist.
UTI was always politically controlled, and used or might i say, abused by the establishment to hold the markets during crashes and bail it out during difficult times.
The rot really set in and from 1996-97, when the Trust announced a 1:10 bonus for US-64 unit holders and topped it with a dividend dipping into the reserves.
Corporates were allowed to invest in UTI 64, and were given tax incentives, which provided to be a lucrative option for both to them and to the fund house that treated UTI 64 like a quasi gilt fund.
The IDBI-government nominee was removed in mid-1997, three years after UTI’s investment in the Reliance group company,
When asked by the JPC about the reasons for withdrawing the IDBI-government nominee from the UTI board in 1997, the then finance secretary, Ajit Kumar, had the follow to state in the verbatim record of evidence:’. . .the overall position since 1991 in a regime which is liberalised has been that these bodies in the financial markets should move towards as much autonomy as possible. The government or the ministry should not interfere in its day-to-day working. The people who are appointed there are responsible and they should be allowed to function.’ Rediff
Interestingly, the CBI had sought the approval of the Finance Ministry, headed by PC ( the current FM ) in 1997 during the tenure of Mr Deve Gowda as Prime Minister to initiate action in the RIL case. However, the agency was not granted approval then, officials said. Hindu
Thus began the decline, to shore up UTI 64, inter fund transfers were rampant and close ended funds never performed to their potential. US 1992 never gave any return to its unit holders on maturity. If the politicians could milk it why couldn’t the trustees and the fund managers and the dealing rooms? There were rumors about substandard investment and front running as the investment decision making was supposedly archaic and done via a paper. The politicians preferred it that way as they were never directly accountable, but could whenever needed heavily influence decision making, as nothing was declared and the whole scheme was centrally administered buy the trustees. Whenever the markets crashed, calls from Delhi ensured that UTI would promptly prop it up.
Then came the the BJP government in March 1998 and nothing really changed for UTI64, though there was an attempt to change the UTI culture and a bailout package ensued as UTI adopting some recommendations of the Deepak Parekh committee set up in Nov 1998.
This step isolated the rest of the UTI funds from the then problematic US64, as the grand daddy of mfs rambled on.The government had lost a salient chance to declare the NAV of the scheme to the public and this was BJP governments biggest mistake. Rediff on the UTI Crises Here is a timeline of events:
On March 14 1999, UTI decided to link the sale and repurchase price of US-64 units to NAV in three years’ time.
In July 1999, UTI still maintained the debt-equity mix in US-64 scheme at 66:34 at the end of 1998-99, despite the Parekh Committee recommending a balanced weightage in view of the schemes yearly dividend distribution requirement.
This coincided with the Tech Boom of 1998/ 1999 and the Rise of Ketan Parekh, the low profile soft spoken Chartered Accountant. The companies in which KP held stakes or the renouned K10 included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), DSQ Soft, Zee Telefilms, Crest Communications, and PentaMedia Graphics
The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well but UTI didnt benefit from the tech boom. In june 1999 they started to sell their PSU portfolio, which was then in the doldrums and started buying tech as a supposed followup to parekh committee recomendations.Global, Himachal and DSQ Software will not fit in the universe of an institutional investor, but for Parekh’s presence. The country’s largest mutual fund, UTI’s Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and Global Tele-Systems (1.05 per cent) on September 30, 1999
Read Behind the UTI mess
2 September 1999
Cyclicals and growth stocks spur US-64 scheme with 50% of the top 50 holdings of its restructured portfolio outperforming the Sensex by a wide margin.
9 September 1999
US-64 witnesses a steep erosion of 13.34% or Rs 2,085.51 crore in its unit capital as on 30 June.
10 October 2000
The monthly portfolio of US-64 reveals an exposure of over 19% to Reliance group companies as on 30 September 2000.
In December 2000, the NASDAQ crashed again and technology stocks took the hardest beating ever in the US. Led by doubts regarding the future of technology stocks, prices started falling across the globe and mutual funds and brokers began selling them. KP began to have liquidity problems and lost a lot of money during that period
More and more US64 looked like a ponzi scheme.
28 February 2000
UTI chief declares that all fresh mobilisations in US-64 to be allocated to debt instruments, following a surge in equity component to 72%.
On 30 June 2000, UTI sets up a “corporate repositioning committee”, headed by Y H Malegam, to revisit Deepak Parekh panel report and draw up a corporate plan for the fund.
19 February 2001
US-64 cuts exposure to New Economy sectors from 21.65% to 16.50% as of December 2000. Instead, it increases exposure to telecommunication from 6.24% to 7.30% and FMCG from 7.71% to 12.51%.
Some decisions taken by the UTI are very suspect, especially investments in K10 and tech scripts rather late in the tech rally. Rumor has it that this was done to bail out market hands stuck with high priced scripts. A little later when the disinvestment happened there was some value unlocking in the PSUS something missed out by UTI.By that time it looked like everyone had their hands in the Uti till ! except of corse the trusting investor. Yet again Reliance was seen to be a major beneficiary of the UTI largess.
SBI, a trustee with insider information pulls out, selling its UTI 64 units, so does ILFS, a company headed by the then UTI Chairman, Mr. P.S. Subramanyam.
Most corporates like Reliance, IPCL, BPCL, IOC, Tata and other MNCs were among US-64 investors who sold their units at around Rs 14.25 per unit. The bulk of the redemptions during April and May of over Rs 4,100 crore were carried out by top corporates and commercial banks, fuelling suspicions of sensitive market information having been passed on to them. source PIL
The impending fall is the best kept secret/rumor in the grapevine. I have an inkling that the nav is negative and pull out of most of my US64 units.
4 July 2001
UTI suspends sale and repurchase of US-64 units resulting in panic among investors. This stuns the investors and the BSE Sensex falls 114 points on the next day. Panic among investors due to suspension of repurchase and sales on US-64 and the consequent heat from the finance ministry forces UTI chief P S Subramanyam to resign.
Government’s rescue package for the bail-out to be restricted to Rs 10,000 per investor while UTI declares it requires an infusion of Rs 3,000 crore to cover the principal amount and a dividend of 10% declared by Subramanyam. Government relaxes bank ceiling on borrowings against securities for UTI.
The long search for a head at ends with M Damodaran, joint secretary in banking division of the finance ministry, being declared as the new UTI chief.
Finance ministry rolls out a Rs 300-crore rescue package which offers unitholders the opportunity to liquidate their holdings and achieve capital appreciation through a step-up repurchase till May 2003. Investors can offer up to 3,000 units for repurchase between August 2001 and May 2003. The repurchase price in August fixed at Rs 10 per unit to be increased by 10 paise every month.
Read Another raw deal for UTI investors
The Central Bureau of Investigation (CBI) raids the residences of former UTI chairman P S Subramanyam and other senior officials in connection with a case of conspiracy relating to private placement of shares of Cyberspace Infosys. Other senior officials whose houses have been raided are executive directors M M Kapur and S K Basu and general manager Prima Madhuprasad. Late in the evening, CBI interrogates Subramanyam in connection with the fiasco.
The CBI economic offences wing arrests Subramanyam, Kapur, Basu and stock broker Rakesh Mehta for the misappropriation of UTI funds. All UTI officials remanded to police custody till 27 July.
Being charged with misappropriation of UTI funds of Rs 32 crore, Arvind Johari of Cyberspace further remanded to police custody till 7 August. Finance Minister Yashwant Sinha claims that ex-UTI chief P S Subramanyam kept the finance ministry in the dark over the US-64 issue. Rejecting the opposition’s demand for a Joint Parliamentary Committee on UTI, Sinha says that his resignation wil not solve the issue and assures the Rajya Sabha that CBI will probe all aspects in the UTI muddle.
UTI officials P S Subramanyam, S K Basu, M M Kapur and stock broker Rakesh Mehta are granted bail by Special Judge S R Mehra. Cyberspace Infosys’ director Arvind Johari refused bail and remanded to judicial custody till 14 August. The judge said in his order that the state has unearthed all incriminating documents against the accused.
Tamil Nadu chief minister J Jayalalithaa denies any nexus with ex-UTI chief P S Subramanyam.
The Tarapore Committee further reports that UTI had made fresh investments of Rs 1.66 billion in companies where existing investments were classified as non-performing assets. In eight of these cases, UTI had taken fresh exposure in companies which had already defaulted on payment. Meanwhile, the Centre decides to lend fiscal support to UTI, besides subscribing to liquidity bonds and asking banks to further extend the Rs 30-billion line of credit to the Trust.
UTI declares the first NAV of US-64 at Rs 5.81, which is 44% lower than its repurchase price of Rs 10.5 for January 2001.
The Parliament grants its approval for bifurcation of UTI into UTI-I and UTI-II. The Rajya Sabha approves the UTI Bill 2002, already passed by the Lok Sabha, by a voice vote
The NAV of US-64 drops down to Rs 6. As a part of its cost-cutting exercise, UTI decides to delist all schemes from stock exchanges by the end of January this year. Sale and repurchase for the schemes made available through the repurchase window.
11 March 2003
US-64 investors to get option of tax-free 6.75% bonds from May
The government will offer to buy back the units of Unit Trust of India’s flagship scheme US-64 in cash or give the investors an option to convert them into 5-year tax-free bonds bearing an interest rate of 6.75% from May this year.
UTI 64s demise was a major event, one that also helped shatter the BJP campaign Shining India campaign
May 25 2008
This is an end of an era. UTI bonds finally mature, giving bitter memories to many of its trusting investors. Will the politicians of the Congress, now in power, and have now made a windfall gain both in terms of votes and on the asset sale of the SUS reward the investors making it a little more just for them by giving them a tax free bonus?
The package that saved the financial markets of this country along with its politicians, did little to help UTI’s Small Investors, some of who stupidly invested their life savings into the fund. They faced so much mental, physical trauma visiting the UTI offices and standing in big queues, withdrawing the 3000 units they were allowed to, at rates far below the administered repurchase price they had seen a few months ago, due essentially to a mess created by the politicians of this country.When the rescue package came out, the opposition, now in power played sufficient politics wasting a lot of time and money in Parliamentary sessions,
After all the circus and the shouting, and all the wastage of money on the endless debates in the Parliament, the JPC, came to a naught, the PIL had already been withdrawn.
No action was really taken against all the responsible trustees including Subramanyam the then Chairman and others in the group. Once again and you don’t need to guess the reason why the whole investigation bore no fruit and nobody was punished. Go see Jane bhi do yaroon instead..
Read ‘Govt must accept liability to help UTI survive’
That was the time when i really I start hating Yashwant Sinha, the FM and the Opposition and the entire Political Class of this nation, because of the way investors were treated. The government had announced capital gains tax exemption for US-64 investors, with the sole intention of killing capital loss suffered by investors due to the UTI 64 debacle so they stood no chance of adjusting it against future capital gains.
UTI 64 taught me one thing. In this country which is governed by so many unenforceable weak laws, for the aam admi , there are a few golden rules, CAVEAT EMPTOR or May the buyer be aware, don’t be greedy and don’t ever trust either the politicians or the regulators.
The Future of UTI as UTI MF.
UTI MF is the new avatar of UTI and little has changed in the work culture of the company. The only thing i saw was the change of Mumbai HO from WTC 29 floor to their new mini castle at Bandra-Kurla complex. The performance of some schemes has shown a marked improvement and so is its sales pitch, but trust me, Nothing has really changed – it is better to stay away from this fund house, because the service is still horrendous!
They have recently changed from UTIISL to KARVY as the registrar for investor services. Most people have no clue as many dividend warrants and redemption proceeds have been stuck up in the mess.
Such is their service that a dividend warrant of a decent sum was returned undelivered for 2 yrs consecutively without me having been proper intimated. Even after sending 7 letters and a large amt of emails, meeting the Chairman’s PA twice and almost 8 months of delay no action was taken. A SEBI complaint and a threat to go to the press and Pehredar ensured that i get those said warrants after due delay of almost a year. Id recommend u to sticks to good fund houses like the HDFC MF , which has a good service track record.
Somehow The price fixing of the UTI 64 reminds me of the current fixing of OIL prices and hope the nation doesn’t have to pay a steep price in the future as the UTI investors did.
ps i need a time out from blogging , so i hope i don’t post for some time.