Silence Of The Bulls

For the first two days, Central Bureau of Investigation (cbi) sleuths questioning disgraced ex-uti chairman P.S. Subramanyam in Mumbai were perplexed by his stoic silence. But on the third day, his revelations sent the interrogators into a spin—that all decisions pertaining to the controversial companies of Ketan Parekh were taken at the behest of senior bureaucrats from Delhi. This is not all. Subramanyam, according to highly-placed sources, told his interrogators that he has many of his conversations with top officials on tape and neatly transcribed!

Senior finance ministry officials now admit that in the last two years, they had received several complaints from uti board members about strange investment decisions. Says a top finance ministry bureaucrat: "But whenever Subramanyam was contacted, he never talked of any pressure. He said the board was unanimous on the decisions and defended these as pure market-play. In fact, we were given a report in May that a lower but reasonable dividend will be given to the US-64 investors."

Will the real story of the scam ever see daylight? Even as the government brazens out the barrage of criticism over uti's suspicious investments, an effort is on to narrow down the investigation to just a single case of alleged corruption. According to cbi joint director, Neeraj Kumar, who is heading the investigations, the agency has no directions to probe beyond the linkages between Subramanyam and the Johari brothers, owners of the dud company, Cyberspace Infosys. Says Kumar: "Till now, I have not been asked to look into any other investments made by uti." According to a finance ministry official, investigating all of uti's investments since 1994 could shake the very foundations of Indian business and also put a question mark on the role of the political class, cutting across party lines. "Since the '90s, uti has been used by various governments to influence markets and also to bestow favours on friendly business houses. It was very clear that if this manipulation went on unchecked, the bubble will eventually burst. It has now," points out an official in the revenue department.

Meanwhile, insiders reveal that a key file pertaining to a 1994 uti investment of Rs 775 crore in a Mumbai-based business house is missing from the finance ministry. The file also contains details of uti picking up shares in the company a year later at Rs 401 per share when the market price was Rs 280. This important file, which marks the beginning of uti making huge and questionable investments in corporate houses, is now being reconstructed.

That uti fund-managers threw caution to the winds when squandering public monies is illustrated in the manner in which they ignored its own equity research cell's advice in the Cyberspace Infosys case. On July 17, 2000, Subramanyam and other directors took cognisance of the warnings and rejected the proposed investment. But four days later, it did a U-turn and the investment was made. Subramanyam has told the cbi that this was after pressure from Delhi.

Brazen irresponsibility and cavalier flouting of all reasonable norms are the hallmarks of the uti tale. In 1998, the government spent Rs 3,300 crore to bail the fund out of its first US-64 crisis. uti learnt nothing from this and pursued its business in a manner that would have embarrassed even the most incompetent gambler. Between July 2000 and April 2001, it picked up 81 lakh shares of Jindal Vijaynagar Steel at a time when the steel industry was in recession.It bought Rs 12 crore worth of Geekay Exim shares, as the share price halved from Rs 7 to Rs 3.55. It bought 2.25 lakh shares of Pritish Nandy Communications through a private placement in March 2000 at a stunning price of Rs 300 per Rs 10 share. The scrip is currently quoting at Rs 33.

UTI recklessly pumped money into ice shares, especially those favoured by tainted bull operator Ketan Parekh. Indeed, when ice share prices started plummeting, and everyone was busy selling, uti continued on its buying spree! According to bjp MP Kirit Somaiya, between May 2000 (a month after the Nasdaq tanked and ice shares went into a free fall) and December 2000, uti's exposure on ice stocks shot up from 10.55 per cent to 33 per cent. This is utterly inexcusable. "Everybody knows that Parekh used uti as an exit route for his shares, and dumped his losses on the fund," says a market source.

At the end of the day, uti's portfolio is left inundated with either debt paper from dud steel and textile companies or ice shares which are quoting far below the prices uti bought them at. Indeed, according to analysts, the ice shares that were uti's favourites have the following common characteristics—dubious promoter records; weak business models or fictitious models assembled with an eye on the markets; some prominent market operator has a significant stake and is speculating on the shares; and promoters and operators are colluding to jack up prices. While tracking uti files, cbi sleuths managed to procure a few documents with some amazing official notings. One such note pertains to uti and sbi Caps investments in companies like Padmini Polymer and Cyberspace Infosys. While the sbi Caps files have notings that say that it could invest if uti does the same, the uti file notings openly mentions the name of Ketan Parekh and says it would follow the Big Bull's movements in these companies and act accordingly. The other uti modus operandi was private placements in unlisted companies. How much it lost here may take some time to assess.

At some point, uti's size started working against it. Whenever it got into the secondary market to buy, word would get around and punters would get in, raising the price. And whenever it wanted to sell, others did it faster, depressing the price. As a result, uti started taking stakes in companies before they had an ipo and were publicly listed—post-ipo, uti could sell the shares and make profit. Nothing wrong with this strategy, except that uti seems to have chosen many of the companies to invest in very strangely.

For, the scope for skullduggery is also higher here. If you are a secondary market player, then chances of fudging is lesser because the market conditions will control you. But when you are buying preferential allotments or making private placements, it becomes easier for promoters to sell the shares at a higher-than-fair price because there is less data available for benchmarking the price. It is also easier for a corrupt official to explain the price he is paying.

And in uti's case, many of its careless pre-ipo investments turned sour because the ipos never happened, leaving the fund with enormous amounts of shares that will never recover the investments. These investments were made from the money it earned selling blue-chips like itc and Hindustan Lever.

Now UTI has approached the banks for term loans. Industry sources feel this may not be easy—banks will ask for good quality assets as security.Now, if the banks ask for the A-group portfolio, uti may be forced to keep them with the banks. Thus, once again, the US-64 investors will be stuck with nothing but all the questionable investments.

Key among the recommendations made by the Deepak Parekh Committee after the 1998 bailout was that US-64 should be driven by the nav (Net Asset Value) in three years' time. This was not done. The committee had also pointed out that the equity exposure of the scheme was to be reduced from 79.3 per cent to 54.5 per cent. This too was ignored as uti maintained its dangerous exposure in the market. Says Prithvi Haldea, MD of Prime Database: "You cannot invest so heavily in the equity market, especially ipos and yet promise assured returns." Says a finance ministry source: "It was for the ministry to have kept a watch. uti files monthly reports on its investments. The ministry cannot wash its hands of it."

What also added to the rot in uti was the penchant of its many chairmen to impress investors with increased dividends even as incomes declined. Thus in '89-90 it paid Rs 1,264 crore as dividend (18 per cent) when its net income was Rs 1,289 crore. In '94-95, it paid out Rs 3,973 crore (36 per cent) when its income was only Rs 3,158 crore. In '97, the shortfall peaked with uti paying Rs 3,174 crore against an income of only Rs 1,061 crore!

Add political interference to this and the picture is complete. Insiders say that shady operators, corrupted by unscrupulous officials and brokers, were central to the uti scam. For this is not just a story of bad economics and ethics. In here lies an undependable political regime presiding over a Rs 60,000 crore empire with its eyes closed.