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The Rediff Business Interview/ Dr Basudeb Sen

'This sort of thing happens in all countries, there's no need for panic'

Ever since P S Subramaniam, the newly appointed chairman of the Unit Trust of India, India's largest mutual fund, announced that its flagship, the US-64 scheme, has a negative balance of Rs 10.50 billion, the capital markets have been in a tizzy.

On Monday, the Sensex crashed 224 points. After a recovery of sorts on Tuesday and Wednesday, it again plunged 112 points today, triggering rumours that the UTI is selling shares to raise money to repay its panicky investors.

However, in an exclusive interview to Syed Firdaus Ashraf, UTI Executive Director Dr Basudeb Sen maintained that his fund cannot be blamed for the market madness. The chief of the UTI's investments, international finance, policy, planning and research also denied that investors are making a beeline for UTI offices only to seek repayment. ''The US-64 issue is a temporary one,'' he said in the course of the interview. ''UTI will overcome it.''

UTI was known for its ''honesty, security and innovativeness''. There is a view that it is a thing of the past. As if in agreement, UTI seems to have launched a damage-control exercise.

Firstly, I would like to say that the strength of UTI is not shaken. Neither the security nor the innovativeness nor the honesty of UTI is under question.

And as far as the security is concerned, even Finance Minister Yashwant Sinha has said that there is no need (for investors) to panic about their investments with UTI.

And about the damage-control exercise, most of the news reports about the health of the US-64 scheme and its prospects are speculative in nature. On this we are clearing the doubts of the investors. I hope our clarifications will clear the panic in the minds of the people.

Do you think that investors' confidence has been shaken after the UTI chairman admitted that the scheme has a negative balance?

No, I don't think the investor sentiment at large has been shaken. They have not lost the confidence in UTI. In fact, most of them till today are staying with UTI.

Some investors have been asking us about the current state of UTI. We have been explaining to them our position. This only shows they have the confidence in UTI.

These investors are trying to clarify on what is being published in the newspapers. Let me clarify: UTI is absolutely healthy and, at any given moment, can return to the investors their money.

There are rumours that all over India, investors are flocking to UTI offices to recollect their money.

I would say a lot of UTI investors have come to repurchase US-64 units. But if you go to any UTI office, you may usually see large crowds. And all these people come a-visiting not only for this but for transacting in our large number of other schemes which are serviced from our offices. Many people come to our offices to deposit their money in different schemes. So the presence of crowds should not be interpreted as a rush for redemption of US-64.

How many investors have sought to recover their money after the October 5 Sensex crash?

I have no ready figure. But I can tell you that on October 5, 6, 7 and 8, there were requests for redemption totalling up to about Rs 3 billion.

In the first week of September, we received similar requests for redemption for Rs 2.5 billion.

This is normal.

And the general practice is that the repurchases take place in the first week of the month. The reason is that prices are constant for the whole month and somebody who wants to exit will exit in the first week of a new month.

So, at this stage we do not see a heavy rush for withdrawal from US-64. But there are a few people who have come for redemption of US-64. But you cannot call it a rush. So, we have all the reasons to believe that the investors are confident about US-64.

The general feeling is that everything about US-64 is not very well. What went wrong?

Some news reports are contrary to what our chairman had actually said. US-64 gave a dividend of 20 per cent for 1997-98. This was out of the income generated by the scheme. And by no other means.

The chairman has also said that the prices in the stock markets have come down. And they came down very sharply in the last few months. As a result, the investments which we have in equity, the value of this investment has depreciated. Now, this depreciation, according to our board of trustees, is a temporary phenomenon and is not a permanent diminution in the value of our holdings.

Because, these holdings are mostly in blue chip and fundamentally strong companies in India. And the current fall in their stock prices does not represent their long-term value. So, we have said there is no reason for the people to panic.

We have said the market need not panic, that UTI will not sell in the stock market in the current situation. The US-64 portfolio may in the long- and medium-term reduce the equity percentage.

But there is a criticism that UTI carved out income from other schemes to give a high dividend to US-64 investors.

I don't think anybody has said this. Only income generated from the US-64 scheme was distributed to US-64 holders. The dividend was not from any other source.

How do you explain the rumours?

It is very difficult for me to say anything about that. Only that these are baseless. The chairman said that the depreciation in equity portfolio is not a permanent diminution in the value of our holdings. Because, the holdings are in very good, fundamentally strong companies.

On the day the market crashed, there was a talk that UTI resorted to heavy selling.

That day UTI did not sell. The market went down for some other reason. Those reasons are well-known. Because on October 5, the markets in India opened after a five-day holiday. In between, there was a dramatic fall in the markets across the world. And the FIIs sell their holdings if they lose in some other markets. They must have found in that day the right time to divest in India.

UTI's management has come under fire from investment gurus.

If some critics feel that the UTI management is incompetent, they are entitled to their views. But at the same time, there are so many people who say that the UTI management has some of the best fund managers in the country.

Forget the critics, former UTI chairman Dr S A Dave himself said that the equity tilt is the beginning of the end, that this can kill the US-64 scheme?

I have not spoken to Dr Dave personally. Something has appeared in the newspapers. But I cannot react to such media reports. I cannot comment on what Dr Dave apparently said in which context.

The US-64 issue seems to have eroded investor confidence in the mutual fund industry. What about the future?

You see the investments in mutual funds will have their own cycles depending on the stock market conditions. So you cannot say that because of certain happenings this year, the prospects and future of the mutual fund industry is bleak.

The world over, the mutual fund industry is growing. This sort of thing happens in all countries and industries. Maybe in India, we are seeing this for the first time and wondering. The mutual funds have experienced this kind of situation in other countries.

Even in the USA, in the initial phase of development, mutual funds went through similar situations.

Is UTI finding it difficult to manage unusually huge funds like US-64, especially when faced with uncertain returns from the stock market?

For 34 years, US-64 has been a large fund. And it has performed well. Nobody can predict the future. But everybody has to base his judgement on what happened in the past. There are huge funds abroad doing well. But sometimes, they too have difficulties. But most of the time, they are doing well. In India, we have example of US-64 that has performed consistently well, barring once or twice. So that speaks for itself.

If the funds are large and returns are low, what do you do?

The funds have been too large for US-64 always. US-64 has larger funds today than what it had a few years back. Today, its corpus is Rs 220 billion; a few years back it was Rs 300 billion. Most people have retained their association with US-64 all these 34 years.

There is a view that US-64 must come under the purview of SEBI, that it must not be given special privileges.

I have nothing to say to this. UTI is governed by an act of Parliament and it has to work in that particular fashion. We have no particular choice.

The UTI issue, some people say, is symptomatic of the Asian flu. Everywhere, financial institutions seem to be under pressure, in fact, crumbling, as in Japan.

No way can the Indian economy be compared to the South-East Asian economies. It will grow and continue to grow. These economies will have to bounce back from a major decline. That does not mean we do not have a problem. But we are on the growth path. But these countries are seeing a decline. So, we cannot compare our situation with their's. We are not on the same plane as that of these economies.

Interviews