Predictable patterns - lessons from US-64 crisis

By C. R. L. Narasimhan

The happenings at the Unit Trust of India, unfortunate as they are, have been predictable. The seeds of its present serious trouble were sown in the July 2 announcement by its then Chairman, Mr. P. S. Subramanyam. On that day, the UTI suspended the sale and repurchase of units with the public for six months, a period within which it hoped to restructure the scheme drastically. The Trust also declared a dividend of 10 per cent, hardly something which insolvent organisations will do.

But it appears that one or the other of certain highly detrimental forces overwhelmed the UTI and cost its top management dearly. The developments since then are predictable to a degree, except that in this case the police investigations and so on have begun at the top.

Whatever happens next, the UTI as an organisation will never be the same. Almost entirely because the Government has chosen to disown it. Spectacularly demonstrated by the Finance Minister's statement that he was unaware of the UTI's decision to freeze repurchase, the Government's treatment of the largest and oldest mutual fund is baffling only to the novices.

Those who care to remember will easily see a pattern of the Government devaluing by a wide margin its own assets.

Note how shabbily the Government owned institutions were treated after the 1992 market crisis. Never mind that even the Joint Parliamentary Committee (JPC) of that period identified foreign banks to be the prime initiators.

Build confidence

In times of crisis confidence building measures are necessary. More so because government owned institutions such as the UTI are perceived to be intrinsically safer than privately owned financial institutions. It is the Government's duty to protect those beliefs. Even in a financial sense, the only appropriate course of action is to do everything it can to uphold investors' confidence. There is also a pattern in the way UTI's problems came to dominate the centrestage. A major part of the blame ought to lie with the communication strategy pursued by the Trust before its problems caught up with it. Here again, it has been in good company.

The top managements of public sector institutions have never been able to put across their inherent strengths and often superior achievements either to their investors or to their owners. As a rule, bank CEOs and those heading the public financial institutions adopt a ``defensive'' communication strategy that might have served them well when there were no competitors. The advent of outside shareholders for the first time, as has been the case in most banks, ought to have been an occasion to reinvent a new strategy but this has not happened. Note how even mainline experts pronounce a verdict on the US-64: failed organisation, insolvent and so on when all that has had happened was an ill advised move to block its liquidity. The Government and the UTI have not been able to counter the assault on UTI's credibility. Any mutual fund or for that matter a better regulated bank cannot withstand a run . There is a risk that the US-64 will face a run unless some credibility is restored.

The best ways to do that are also the most obvious. In comparison to many other schemes, whether of the private or the public sector, the US-64 has not fared that badly. Certainly the solvency of the scheme ought not to be a matter of speculation. The Government especially has plenty of responsibility in ensuring that things do not spin out of control. At this stage, the image of a leading organisation is at stake. Can anyone really maintain that the Government of India's credibility will not be affected if UTI is sent down on a spiral?

Credibility first

CEOs and senior executives of the affected organisations may have to go if circumstances warrant. But nothing is gained and practically everything is lost by fixing all the blame for what went wrong on one or a few individuals. Besides, it is preposterous even to imply that a few transactions, however flawed they might be, can derail an entire scheme of almost three decades. Most certainly there have been errors of judgment. There would be instances where investment decisions were taken under extraneous pressure. And there could be fraudulence also.

But to paint the UTI in the blackest of black colours is totally uncalled for. And what is worse, the Government, by abdicating its responsibility to reinject badly needed confidence, is allowing the situation to spin out of control. The only positive blow that the Government has struck for UTI and its large investors is to appoint Mr. M. Damodharan as the Chairman. Contrary to what many experts say, an outsider ``generalist'' is likely to be far more dispassionate in his approach to sensational problems such as those afflicting the UTI.

Getting back to the specifics of the UTI crisis, it is ironical that on July 2, the then UTI Chairman was merely making public what everyone else was speculating about: that the Trust's flagship US-64 scheme has had a less than satisfactory run over the last financial year was widely known. But how badly it had fared has been a matter of conjecture. This is because the US-64 unlike other mutual funds does not disclose its net asset value (NAV). Such lack of transparency has been the undoing of the scheme.

In retrospect, the Trust's management ought to have spelt out - much before July - why they could not shift to an NAV based scheme. Ideally they ought to have done so at a time when the scheme was in surplus - that is, when its (undisclosed) NAV was above the then repurchase price. Nothing would have been better than declaring an NAV. The newly announced NAV would have gyrated like the ICE stocks that supported the US-64 then.

There would have been criticism on that score but it would have been a small price to pay compared to an opaque NAV-less scheme.

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