UTI: High-Handedness
In November ’96, UTI’s Masterplus 91 floated a rightsissue. For every two units held, you got one unit more at Rs 10. Consider thescenario if you didn’t want another unit. The NAV of the scheme, then Rs20.47, would drop to around Rs 16—because the assets would be distributed overmore units. There was no point selling off units since they were quoting at Rs11. The UTI wouldn’t buy them back at a near-NAV price till ’99. So, thoughyou can renounce your rights, you end up with lower returns if you do so. Amonth later, the SEBI banned such moves.
The Intra-scheme Transfer Scam
The time has come to pay dividends. A very common ploy used by mutual fundsis to sell off a chunk of shares to another scheme from the same fund, show aprofit and pay dividends. This hides the true value of the transaction to earnshort-term brownie points. Reason: in an illiquid share, where a sale or apurchase of even 1,000 shares moves the price significantly, bulk shares aretraded at the same price. This hurts in two ways. One, perhaps the time is notright to sell the stock for scheme A. Two, the price may not be attractive forscheme B. If, for instance, scheme A buys a share for Rs 100 thinking it wouldgo to Rs 200, but has to sell it at Rs 150 to scheme B, then the gain for boththe schemes works out to only 33 per cent, compared to a 100 per cent gain if Ahad held on. Moreover, scheme B perhaps did not want to invest in the shareanyway.
Accumulated Interest Scam
In income funds, which principally invest in fixed-returninstruments like bonds, the NAV is calculated on the expected interestaccumulation—irrespective of whether that interest actualises or not from thecompany which issues the bonds. That is, if a company pays interest at the endof every year, a fraction of it is added to the NAV every month. The NAV,therefore, shows consistent growth, based on expected interest. At the end ofthe year, the company may say that it doesn’t have the funds yet to pay theinterest. This strange accounting practice allows an insider to make a killingby selling off his units just before this information becomes public, becausethe price he would get would be based on the notional accumulated interest.
The Commissions Scam
When a company comes out with a public issue, it spends a lotof money as issue expenses (brokerage, commission, fees and the like)—muchgreater than the limit imposed by SEBI. Many sub-brokers even advertise theseincentives. When mutual funds subscribe to these shares, it is expected thatthese commissions are not spent. However, the funds do ask for thesecommissions. While some of them share these commissions with the investors (upto a maximum of 1.5 per cent, as specified by SEBI), most don’t. In manycases, anyway, the extra over the 1.5 per cent is reportedly gobbled up by fundexecutives.
Canbank, GIC: Broken Promises
Canbank Mutual Fund launched Canstar in November ’90 as a10-year scheme which would offer regular repurchase at pre-determined pricesfrom the sixth year onwards. As per the terms, the fund was supposed torepurchase units at Rs 23 in November ’96. The NAV of the scheme stood at ameasly Rs 13. The fund held a meeting of unit holders to seek permission torepurchase the units at NAV-related prices. The proposal was shot down, and SEBIdirected Canara Bank, the fund’s sponsor, to make good the Rs 600-croreshortfall. The bank is dithering. The RBI has directed the fund not to launchany scheme till the Canstar issue is resolved. GIC Mutual Fund’s Big Value,launched in 1992, is facing a similar problem. The scheme matures on June 30 andas per the offer document, the redemption price works out to Rs 20.88. CurrentNAV: Rs 15.25. With only two months left, there’s little the fund can do. TheSEBI has demanded that GIC, the trustee, ensure that the minimum assured returnsare met.
The Camouflaged NAV Scam
In the case of investment in unlisted companies, more oftenthan not, the true NAV is not reflected. Reason: since the company is unlistedand there is no official quotation for it, there is no parameter on which itsvalue can be based. This helps the funds in bear markets. Thus, when the marketsfall, the NAV of a scheme with unlisted equity remains buoyant. What ought to bedone is that the NAV of unlisted shares should be taken on the basis of somevaluation, say the book value, and adjustments should be made accordingly. Eventhis, however, can be ambiguous: the book value of a company changes only whenit declares its annual accounts. So, any change in the company’s book valuewill be only on a year-to-year basis.
The Timing Scam
NAVs of many funds rose when share prices went up after Budget ’97. Anintermediary on behalf of a mutual fund offered a cash-rich company a deal:invest in the fund at pre-budget NAV, 10 per cent less than the post-budget one.Of course, the cheque should be four days backdated. In effect, a Rs 1-croreinvestment would be buying units worth Rs 1.10 crore. The need to garner fundsto show an increasing corpus is so great that fund managers compromise onethics. This increased corpus allows the fund to increase its fee—about 1 percent of the total corpus. There’s not a single mutual fund balance sheet thatsays auditors have checked the dates of cheques and the corresponding moneyflow.
Morgan Stanley: Misleader
Announcing that the units will be distributed on afirst-come-first-serve basis was an excellent marketing gimmick for MorganStanley; but bad for industry. This small announcement led to application formsof the issue being sold for Rs 35. What has made matters worse is the poorperformance of the fund: after more than three years, on an NAV of Rs 8.56, thescheme, at Rs 6.40, trades at a discount of 25 per cent to its NAV.
