September 9, 2002
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The Rediff Interview/ UTI Chairman M Damodaran
PART I: ''This will be the last bailout'' UTI Chairman M Damodaran's interview with Kanchana Suggu continues: Would you agree that millions of investors have had to suffer because of some unscrupulous UTI managers? Let me take this question from the end to the beginning. Have there been any unscrupulous managers? No. I said this is in public earlier and let me repeat this to you. But you did say except in one particular case. Which was that? Except one particular case which is by way of private placement of Rs 32 crores (Rs 320 million) in Cyberspace Infosys, where there is an allegation that the decision is not bonafide. There is an allegation, I want to stress that, where a case has been registered and where there's no charge sheet filed yet. So we don't know what will happen as a result of the investigation. It's been a year since the case was registered. I don't want to comment on the facts of that particular case. The fact of the matter is that on the day UTI made the investment at Rs 930 per share by way of private placement, the market price was more than Rs 1,000. I will just state that fact and leave it. Therefore, to think that there is a situation in which a large number of investors have been let down by malafide decisions, I don't think is a correct position. So what went wrong? What went wrong, quite simply, is that UTI invested in a large number of shares which a whole lot of others did -- individual, mutual funds, investors who claim to be savvy. The index went up as a result of those investments. Many people got off at the right stage. UTI didn't exit, stayed with those scrips and came down with those scrips. So there was nothing suspicious about those investments. A large number of those investments were made in excellent companies, but the entry levels were possibly high. The fund management did not exit at the right time. But this is the wisdom of hindsight. I don't want to be judgemental on that. There were quite clearly errors of judgement on whether a particular scrip was a good scrip to enter at a particular price. Did we enter at a very high price? Did we fail to exit when we should have exited? Were inefficient managers the problem? I won't say inefficient. I would say many other funds and investors made similar calls and suffered. Because UTI is much bigger than anything else in this particular market, the focus is on UTI. Let us look at why all this happened. If UTI had not announced a freeze on the sale and repurchase of units in US-64, I don't think we would have been looking at this problem today. Because if UTI schemes have suffered as a result of depreciation in the value of its equity, so have the schemes of several others who remained invested. Nobody is talking about inefficiency in management there. If you are talking about inefficiency of management, others have been at least as efficient or at least as inefficient. The fact that they don't have an equally large number of investors does not make the quality of decision-making superior. What we need to understand is that this whole issue is looking closely at what UTI did only because of the freeze decision on July 2, which administered a wholly undeserved shock for the investor community. We did not prepare them. Barring that, our record has been at least as good or at least as bad as anyone else. One thing I want to mention to you is that no one including analysts recognizes the fact that an investor does not invest in UTI, he invests in one of 65 or 70 schemes. We have a whole lot of NAV-based schemes where investors have come in with open eyes and seen good returns. Many of our funds are number one in their categories. Out of 20 schemes-open-ended equity funds, which have been evaluated recently, we have 10 in the first quartile, seven in the second, three in the third and none in the fourth. You will see in the fourth quartile all the names of some efficient fund houses. It's not as if we are a bunch of guys who know nothing about the market. On June 30, 1998 UTI's holding in infotech scrips was 0.36 percent. On June 30, 1999, this went up to 3.4 percent. On June 30, 2000, UTI's holding suddenly shot up by 870 percent to 33 percent. Isn't that abnormal? What explanation do you have for this? Let me tell you what happened. If you look at the recommendations of the Deepak Parekh Committee, which UTI got in February 1999, it said among other things, that UTI is underweight in many of the emerging sectors, especially IT. It said that UTI is relatively overweight in traditional sectors. It is as a result of that recommendation and in response thereto that UTI went into many of the scrips and took large positions. Were these right times to make investments in those scrips at those levels at the time when they were skyrocketing? Was there an expectation on part of the fund management that it would go further up and you would make bigger profits? But it didn't work out that way. It sort out slid after a while. We entered in a large way into good stocks. These were Infosys, Wipro and Satyam. And Cyberspace Infosys. It was a very small investment, Rs 32 crores. I don't think 32 crores was the beginning of UTI's problems or the entire UTI's problems. Time will tell whether it was a malafide decision or not. I don't want to jump the gun because when there's not even a charge sheet, forget a trial. But yes, we did go overweight on IT stocks. Which you said was purely on the recommendation of the Deepak Parekh Committee. It is subsequent thereto. Is it entirely consequential? One wouldn't know. But I think the way it turned out, the recommendations must have influenced the thought process of fund managers. And why UTI alone? Look at who else invested. A large number of others invested in those scrips. I think what happens also is because of size. Size is sometimes a constraint. You can't exit if you have large holdings in a scrip as quickly as someone who has smaller holdings in a scrip where you can exit in a single day. I think size is part of the problem. What started as the dream of then finance minister T T Krishnamachari to set up the idea of a unit trust to encourage lower and middle income groups to channelize savings has today driven the very same investor to even suicide. Do you hold yourself responsible for this? I haven't heard of investors committing suicides. I have heard of extreme anger in investors. Let me tell you that from 1964 to 2002, what UTI has contributed to the developmental efforts by channelizing the savings of small investors from throughout the country and bringing it into this process of production is not something you can wish away. Look at the latest SEBI (Securities and Exchange Board of India) studies. It says that all retail investors are still with UTI. But isn't that only because they are hoping to get higher returns on investments? No, it's not just that. If it were only that, fresh savings that retail investors have -- forget the old investments -- would have found a way to other fund houses. You are looking at these increasing numbers in other fund houses on the basis of gross receipts, not netting out the outflows. They are only temporary cash surpluses parked in liquid funds. I do not know if that is really what T T Krishnamachari had in mind when he said mopping up the savings of investors. There is just one organization, which is doing that. However well it is doing that, however badly it is doing that, you cannot take that away. This is the only organization, which is a retail investors organization in the capital market. How responsible do you hold yourself for the anxiety brought to the investors? What is anxiety? Anxiety is a manifestation of a gap between perception and reality. I have a certain expectation level. Whether that expectation is legitimate derived from statements in the offer documents or an expectation because I have chosen to not keep myself informed either at the time of investment or thereafter, there is a certain expectation level. You coast along with that expectation level and that is reinforced by excellent returns, by bonus issues, rights issues over a period of time and I'm talking about Unit Scheme 64. Then suddenly one fine day you are told that for the next six months, there is no sales, there is no repurchase, we are going NAV based, I think that's a body blow to any investor. He is entitled to be angry. You can't get that away. But if you are really thinking in terms of who is responsible, I would like to address the question, responsible for what? Responsible for not bridging the gap between perception and reality over 37 years is something for which Unit Trust is at least as responsible as anyone else. Because typically, you had a very large agency force, which went to an investor and said that you just sign here, we will take care of the rest of the details. The risk factors were never explained. There was no perception that there was a risk factor because everyone thought UTI was a creature of statute, so the government would provide the back stock facility in any case. If you see our offer documents from 1964 to 2001 and I've seen all of them, there is no statement anywhere that there is an assurance of a return or protection of capital; that the money invested will be returned. In fact there are statements which clearly state that past performance is no guarantee of future returns. But that is tucked away in four pages of very, very small print. And whose fault is that? It is our fault. As I said, the question we need to ask ourselves at UTI is what is it that we are responsible for? Is it fund management? Well, fund management certainly wasn't top class. There could have been areas where we could have done better than what we did. But those are things which happen to any fund management team as you can see -- worldwide, and not just India. What we are quite clearly responsible for is that nowhere along the way did we communicate to the investor that look there is an element of risk. The money you are giving us is being invested in capital markets, whether in debt or equity. So it is not as if year after year till infinity you will see all kinds of protection of capital. In the late 1980s, when there was some tax provision that made it attractive for corporates to park surplus funds in US-64 than elsewhere and to exit very quickly, it brought some kind of volatility into what was till then a pure retail investors' scheme. That provision got discontinued 4, 5 years later, but the nature of the scheme underwent some kind of change. A whole lot of money came in. There were not enough debt instruments in the market, so the money that came in had to be deployed in equity. So today, if we talk about what one of the problems was, I would say it was very heavy equity holding in a fund which was supposed to provide returns to retail investors over a period of time. We've corrected most of that. We have repositioned the fund as a balanced fund. But the point I am making is that some of these were unintended offshoots of taxation policies, which impacted on US-64 since there was nothing else of that kind at that point of time. So if you look at what was responsible for where we reached on June 30 or July 2 of 2001, I think there were a whole lot of factors. It's not as if people were sleeping on their job here for 38 years. Then we wouldn't have given 26 percent returns. We are the same people who gave 26 percent returns for bonus issue and things of that nature. We have a lot of value in the portfolio. As that value begins to unfold itself over a period of time, people will start realizing that they are getting returns. PART III: 'US-64 will be smaller than it is now' Design: Uday Kuckian Don't miss the third part of Mr Damodaran's interview on Wednesday!
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