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The Rediff Business Special/ Nikhil Faleiro

After months in a semi-coma, UTI staggers to its feet

The UTI saga: Genesis of a controversy

Blueprint for restoring lost glory

As the dust began to settle after the lid blew on the UTI fiasco and the finger pointing had stopped, the thought uppermost on everyone's mind was: will the suggestions made in the report as well as P S Subramanyam's changes refurbish the image of the rusty trust? Rajesh Bajaj, BSE broker, says, ``For years, they ruled liked kings -- making and breaking rules as per their whim. Do you think they will be amenable to any change?''

Yes. After many months in a semi-coma, UTI is slowly staggering to its feet. When a giant wakes up, the little ones are bound to get trampled underneath the giant's feet. And so it is with UTI. With prudence dictating everyone of its moves, the giant mutual fund is receiving praise from critics.

UTI, under P S Subramanyam's chairmanship, has slashed the brokerage from 1 per cent to a mere 0.25 per cent. With its purchases running into millions of rupees, the 1 per cent brokerage was a massive drain on UTI but Subramanyam's logic was simple. "UTI has always appealed to the small investor. It will continue to do so. Therefore, the 0.25 per cent is still attractive enough to the brokers," says Subramanyam. But the question that still haunts people is, why was this decision not taken before? After all, other institutional clients pay their brokers only about 0.25 per cent of the deal, sometimes less.

One possibility that has arisen is that Subramanyam smelt a nexus between the dealers and the brokers and maybe others higher up in the UTI hierarchy. Slashing the brokerage was not the only significant measure Subramanyam took. He put an end to speculation that he had transferred several dealers and increased their numbers from five to 15. The dealers have also been told to spread their business equitably among all brokers. Similarly, the number of fund managers has been nearly doubled from 20 to 38, thus reducing exposure to the risk of malpractices.

Of course, the minute the news broke of the new dealers being recruited, rumours began to circulate that the new brokers were wet behind the years and the mess would escalate. Basudeb Sen, UTI's executive director, says, "We've got the best. Do not worry. The hiring of new dealers is a standard practice.''

But it was the reduction of the brokerage that will save UTI a vast sum of money which it can use fruitfully. This can be gauged from the fact that in 1998, the operating expenses of US-64 alone, including commissions, were over Rs 1 billion, up from Rs 700 million in 1997.

Another major change that is being pushed through is the overhauling of the three asset management committees formed two years ago -- one, to monitor the US-64 equity and the other two, the US-64 debt scheme.

Until now, three of the four members in each panel were from UTI. Now each panel will have seven members and only two of them from UTI. So fund managers cannot expect panel members to look the other way if there is another financial fiasco. Others that have begun to feel the heat of Subramanyam's actions are firms in which UTI holds a large stake.

In eight companies, UTI has more than a 25 per cent stake, and since a shareholder with more than 24 per cent stake must be consulted before important decisions, UTI is now expected to throw its weight around rather than sit as a sleeping partner.

In 21 firms, UTI has more than a 20 per cent stake and in 51 others, more than 15 per cent. The Deepak Parikh committee has suggested that in firms where UTI feels it does not have a good presence or wants out, it should sell to the highest bidder and make a profit while the going is good.

The trouble is that, till now UTI has never considered this possibility and not taken such obvious decisions. For example, when India Cements moved in on Raasi Cements, UTI preferred to sit tight on its 10.48 per cent stake in Raasi despite attractive offers from India Cements.

But UTI started flexing its muscles, by demanding board representation in firms where it has more than a five per cent stake. There are 495 of them now and most do not have UTI nominees on board. For instance, in Hindalco, where it is the largest shareholder with a 22 per cent stake, UTI does not have a nominee on the board.

Earlier, UTI was content if there was a representative from a financial institution or an insurance firm. Not any more. UTI is now seeking directorship in companies such as the Industrial Credit and Investment Corporation of India, Nestle, Housing Development Finance Corporation and Hindalco. And this list is expected to grow. Says Sanjay Jha, managing director, Walchand Finance Company: ``It is high time UTI begins to act responsibly and enforce its will on its investments.''

But the biggest change is that UTI is now investing in growth stocks. Since July 1998, UTI has invested Rs 12 billion of US-64 funds in growth sectors such as pharmaceuticals, software and fast moving consumer goods. These scrips account for a decent eight per cent of US-64 equity holding of Rs 152 billion in December 1998. In June 1998, UTI's investment in these sectors was a mere Rs 130 million.

However, despite all these changes, UTI will find it difficult to boost the performance of its many schemes. It is not only US-64 which is in trouble. As many of the 33 of the trust's 80 schemes showed negative reserves in December 1998.

UTI chief Subramanyam has a long way to go. He could begin by improving transparency. Bobby Surendranath, chief investment officer, ITC Threadneedle, says, ``If they show they are clean, the faith will come back. They have to show their faith in investors and companies and they will keep the faith in UTI.''

Part IV: End of the Dream

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