Why UTI is pushed to a corner

D. Sampathkumar

GRANTED that the downturn in the market was a contributory factor to the problems the UTI finds itself in today.

But, surely, the UTI management could have reshuffled its US-64 portfolio and backed some winners among the stocks on view?

It would have been nice if the Unit Trust of India had managed to swim against the lacklustre performance of the corporate sector as a whole in the post-liberalisation phase. One would also dearly have wished for the institution to have unerringly picked winners all the way, so that each scrip selected by the UTI seemed like a clone of `Infosys' or a `Wipro' in terms of investment performance.

But for all the talk by the management about rejigging the portfolio there is a fundamental limitation to this strategy. It presupposes that the management has the inherent capacity to exit from poorly performing stocks. But that is really not the case. Any attempt by the UTI at offloading strategic percentages of stake in companies in its portfolio would attract charges of destabilising the incumbent promoter-managements.

One reason why there is no vigorous market for corporate control in the country is because public financial institutions hold large chunks of stake in many old-economy stocks and these institutions will not sell their stake, whatever be the compulsion, to anyone but the promoter managements or their nominees.

Should the UTI or the Government submit itself to this constraint?

Part of the reason is that acquisition of some portion of the stake at least is by way of conversion of loans into equity at prices that bore little or no relation to the intrinsic worth of these shares. It does seem a little unfair to these promoters that the institutions should now seek to profit from these shares for which they themselves never paid the fair price in the first place.

But that is only a smokescreen. There is a deeper purpose as well. Over the years, an unholy alliance has developed between politicians and corporate promoters. Initially, the corporate houses were sources of election finance. But in many cases they also developed into conduits for the ill-gotten gains of the politicians themselves. In the circumstances, the resistance of promoters to any attempt at destabilising their hold over companies is only to be expected. The possible disinvestment by the UTI of strategic stake in companies threatens to do precisely that.

It is worth recalling that in the wake of suspension of sale and repurchase of units under US-64 scheme there was talk of the UTI resorting to strategic sale of stake. But the very next day there were news reports of a rethink within the top management against such a move.

Again, the FI stand with regard to the open offer by the Modis for shares of Modi Rubber is very instructive. They say that offer price of Rs 90 is unattractive. That implies that they do not see any long-term benefit from continued ownership. But they refuse to look beyond the Modis who are the original promoters of the company even as the company is languishing and the FI investment is going nowhere.

What prevents these institutions from reaching out to global tyre majors such as Continental of Germany, or Michelin of France and securing a better price for their holdings in the interest of their small investors? There is no answer.

Is privatisation of the UTI an answer?

It would seem so. But that process too may encounter resistance from entrenched vested interests. The UTI has served as a source of funding for promoters who might otherwise have not had much success in raising money from the public. It is difficult to see large sections of promoter combines which ruled the Indian corporate sector at one time, raising even a few crores of rupees from the Indian public at the present juncture. Yet their entrepreneurial ambitions, such as they are, must find an outlet.

Public financial institutions seem to be the only viable option. One can be sure they are not going to see these institutions being privatised without putting up a fight.

It is an unfortunate characteristic of all societies, both pluralistic and regimented ones, that the concept of ``rule by the few'' for the benefit of the masses is also inherently exploitative in nature.

All manner of informal alliances of a small minority get formed within the society with the sole aim of capturing a portion of the resources that accrue within the society.

Does the UTI management have anything by way of defence?

The UTI may have been guilty of some the worst examples of reckless selection of stocks for investment. But having said that, it must not be forgotten that the UTI does not exist in a vacuum. It is but a mirror image of the Indian corporate sector and a host of other investment/financial institutions themselves. This, then, is the crux of the matter.

If the UTI has had a miserable record in recent times, it is only because it cannot be immune to the problems that the corporate sector has faced and continues to face, in the post-liberalisation phase of the economy. Let us look at the performance of the corporate sector as a whole. According to the Centre for Monitoring Indian Economy, in 1993-94, a fairly wide cross section of corporate entities (numbering around 3,000) posted an average return of eight per cent on shareholder funds (CMIE Industry Financial Aggregates and Ratios, June 2001).

By 1999-2000, a similarly representative cross section of corporate entities analysed by the CMIE showed that the corporate sector posted a return of only three per cent. We need not go into the merits of the sample for its representative character. But this much seems pretty self-evident. There has been a steep decline in productivity of shareholders' funds. It would be futile to expect that the stock market will remain oblivious to this characteristic of declining returns on shareholder funds and not mark values down.

If that be the case, the premier investment institution which, after all, might be expected to carry an exposure in most if not all of entities covered in the CMIE sample too, cannot but fail to reflect such a lacklustre performance in its asset valuation.