Volume 2, No. 9, September 2001


UTI Scam : Robbery Through other Means



The line between ‘legitimate’ business and the mafia is getting increasingly diffused. The greater the liberalisation/globalisation of the economy, the more rampant is the loot. Phoolan Devi as a dacoit in the ravines of Madhya Pradesh could not even dream of the type of wealth made as a Member of Parliament. Her wealth at the time of her death was estimated at a minimum of Rs. 10 crores. But this is small fry compared to the Harshad Mehtas, Bharat Shahs, Ketan Parekhs, Subramanyams etc and the top politicians/bureaucrats/corporate houses with whom they are linked. Phoolan Devi appears as a petty thief compared to these gangsters. The amount robbed through the UTI scam intails thousands of crores — the bulk of which belongs to small investors who have put their life-savings into this scheme.

What is the UTI ?

The Unit Trust of India is the largest mutual fund in the country created in 1964 through an act of parliament. Mutual Funds are financal institutions that invest people’s money in various schemes, giving a ‘gauranteed’ return to the investor. The UTI (of which the US-64 scheme is the largest) was set-up specifically to channel small savings of citizens into investments giving relatively large returns/interest. The US-64 scheme has 2 crore investors, the bulk of whom are small savers, retired people, widows and pensioners. Besides the US-64 the UTI runs 87other schemes giving inverstors various options. But the US-64 has been most popular, giving returns as high as 18% in 1993 and 94.

Genisis of the Scam

Liberalisation of the economy immediately led to the liberalisation of the UTI, throwing it to the mercy of the stock market. In 1992, itself the US-64 scheme was changed from a debt-based fund to one linked to equity. In 1992 only 28% of its funds was in equity; today it is over 70%. Further liberalisation was pushed by Chidambram, as the finance minister of the U F government, who, in 1997, removed all government nominees from the board of the UTI. Besides, the US-64 does not come under SEBI regulations, its investment delails are kept secret (ever depositors cannot know where their funds are being parked) and the chairman has arbitrary powers to personally decide an investment upto a huge Rs 40 crores. Such ‘liberalisation’ is tailor-made for frauds. Not surprisingly, within one year of Chidambram’s liberalisation, in 1998, the UTI crashed, and the new BJP-led government organised a large Rs. 3,500 crore bail-out to prevent default.

It was during this crisis that the new chairman, P.S. Subramanyam, was appointed. Subramanyam was a direct appointee of thug Jayalalitha, who had made his selection a condition for her continuing the support of the then NDA government. Later, though Jayalalitha withdrew from the government, Subramanyam developed close links with the Prime Minister’s Office, and corporative big-wigs. Small investor’s funds were used to promote big business houses, shower favours to politicians, and invest huge amounts in junk bonds....all for a fat commission. Subramanyam functioned like a fascist, arbitrarily transferring hundreds of senior staff, in order to cover his tracks. He was a key player in the Ketan Parekh scam.

Huge amount of UTI funds were channelled into the infamous K-10 list of Keten Parekh stock, such as Himachal Futuristic, Zee Telefilims, Global Tele, DSQ, etc. The UTI continued to buy these shares even when their market value began to crash in mid-2000, in order to prop up the share values of these stocks. The Trust saw its Rs. 30,000 portfolio (value of stocks) lose half its value within a year since Feb. 2000.

To take just one example on how the UTI operated : In August 2000, much after the software stocks had begun to crash, the UTI bought Rs. 34 crores worth of shares in Cyberspace Infosys Ltd at the huge price of Rs 930 per share. Today the shares have no value and its Lacknow based promoters, the Johari Group, are in jail. But, what is astounding is that it was none other than India’s prime minister, Vajpayee, who, as late as Jan. 31, 2001, laid the foundation stone for the Software Tectnology Park (STP) in Luknow, promoted by this group. (Incidentally the UP government had a 26% share in this STP). Coincidentally, in the four days when the UTI reversed its earlier decision and subscribed to 3.45 lakh shares of Cyberspace, Subramanyam had rung up N.K. Singh (then secretary in the PMO) at least 4 times. It does not take much imagination to link UTI purchases in Cyberspace with Vajpayee. Similar were the investments in DSQ Software, HFCL, Sriram Multitech. and others.

Besides, the UTI also invested in junk bonds like Pritish Nandy communications (Rs. 1.5 crores), Jain Studios(Rs.5 crores), Sanjay Khan’s Numero Uno International (Rs. 7.5 crores), Malavika Spindles(Rs. 188 crores) etc. This amounted to nothing but handing over people’s money (investments) to the rich and powerful. Thereby thousands of crores were siphoned off to big business and prominent individuals, with the UTI chairman, bureaucrats and politicians taking their cuts.

But this was not all. The fraud continues even further. With knowledge that the UTI was in a state of collapse, the Chairman organised a high profile propaganda campaign promoting UTI (spending crores of rupees on the top advertising company, Rediffusion), while at the same time leaking information to the big corporates to withdraw their funds. The Chairman thereby duped the lakhs of small investors through false propaganda, while allowing windfall profits to the handfull of big corporates who had invesed in UTI.

So, in the two month prior to the freezing of dealings in UTI shares, a gigantic sum of Rs. 4,141 crores was redeemed. Of this Rs.4,000 crores (97%) were corporate investments. What is more,they were re-purched at the price of Rs. 14.20 per share (face value Rs.10) when in fact its actual value (NAV — net asset value) was not more than Rs. 8. As a result UTI’s small investors lost a further Rs. 1,300 crores to the big corporates.

In fact these huge withdrawals further precipated the crisis. On July 4, 2001 the board of UTI took the unprecedented step of freezing the purchase and sale of all US-64 UTI shares for six months. Simultaneously it declared a pathetic dividend of 7% (10% on face-value), which is even lower than the interests of the banks and post office saving schemes. Such freezing of legally held shares is unheard of — and is like overnight declaring Rs. 100 notes as invalid for some time. In other words the 2 crore shareholders could not re-invest their money elsewhere — and would have to passively see their share price erode from Rs. 14 (at which they would have purchased it) to Rs 8 — and get interest at a mere 7% on their initial investments. Fearing a back-lash, the government/UTI later announced the ability to repurchase UTI shares at Rs. 10 — i.e. at 30 % below the purchase price.

Imagine the plight of a retired person who would have put a large part of his/her PF, gratuity etc. in the US-64 scheme, considering it the safest possible investment. Not only has the person’s income (interest/dividend) halved overnight, he/she also stands to lose a large part of the investment. So, a person who invested Rs. 1 lakh would now only get back Rs 70,000.

Today, the entire middle class is being robbed of their savings — first it was by the private mutual funds (NBFCs), now by the govt. sponsored mutual fund. Those who gain are the robber barons who run the country’s economics, finance, politics.

The middle-classes, affected by these scame, will soon realise the facts and come out of the euphoria of consumerism that has numbed their senses. They will see through the hoax of globalisation/liberalisation, and will turn their wrath on these so-called pillars of society. It is important that this impending explosion be channeled in a revolutionary direction, or else it will be diverted by the ruling elite into fatricidal clashes. The middle-classes are most prone to fall prey to ruling-class propaganda. But life itself is the best educator. Faced with unemployment, loot of their savings, price rise of all essentials, etc. they will no doubt, join the working class and their peasant brethrens in revolt.




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