UTI's largest single investment in RIL under scrutiny

After Cyberspace and Ketan Parekh stocks, it is now UTI's largest single investment in Reliance Industries Limited (RIL) that is under scrutiny. The Ministry of Finance, SEBI, Department of Company Affairs and the CBI have already investigated the seven-year-old investment. Yet questions on its merit abound. INDIA TODAY presents a primer on this never-dying controversy and other big investments of UTI.

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It was UTI's largest ever single investment but it followed pricing norms of the day. Swadeshi Jagran Manch Convener S. Gurumurthy claims that UTI paid Rs 385 for each RIL share while Reliance promoters Ambanis allotted shares to themselves at Rs 61. Reliance confirms that warrants (convertible into shares) were issued to the promoters but claims that these were priced at Rs 150 each, payable within six years of allotment.

This was done through a resolution passed at the company's annual general meeting (AGM) on December 12, 1992 when the RIL share price was Rs 242. In the 20 months between December 1992 and October 1994 (when UTI bought RIL shares at Rs 385), RIL share prices had risen consistently and the company had issued foreign currency convertible bonds at Rs 288 per share and a global depository receipt issue at Rs 369 a share.

According to SEBI guidelines of August 4, 1994, the minimum price of an RIL share in October 1994 on preferential allotment worked out to Rs 377. The market price of the share that month was in the range of Rs 410 to Rs 450 and the price of Rs 385 a share which UTI paid was a discount of 6 per cent on the market price.

The share warrants issued to the Ambanis in December 1992 were actually allotted to them in 1994. According to the AGM resolution the Ambanis paid Rs 150 for those warrants at the end of six years, in 2000. Gurumurthy's claim is that the Rs 150 paid in 2000 for a transaction settled in 1992 actually amounts to paying just Rs 61 a share at current value. Reliance dubs this argument as misconceived. The October 1994 investment of UTI in RIL shares totalled Rs 773 crore. Six months before that UTI also invested Rs 300 crore in non-convertible debentures of RIL at Rs 337. In all, UTI invested Rs 1,073 crore in one company in less than a year.

Q. Why did UTI buy RIL shares through private placement and not from the market?
Because open market purchase would have made the acquisition costlier. UTI had launched around half-a-dozen new : schemes in 1993 and 1994. Thanks to the post-Harshad Mehta scare, these schemes drew investors in droves and collected over Rs 1,200 crore through tax-planning and retirement schemes. Obviously, these funds had to be invested.

If UTI had used the market route it would have triggered a spiral in prices, given the fact that it is the biggest player and because of the volume and value involved. Private placement not only offers price stability for the purchase decision, but also enables the fund to negotiate a discount as against the step-up premium it would trigger through open market operations.

Apart from RIL, UTI bought shares of eight other companies through private placements in 1994. Returns on most of these investments, other than in HDFC, have been negative. All private placements done after August 1994 had lock-in periods.

Q. Did the investment in Reliance shares turn US-64 scheme into an equity fund?
Yes, it certainly did. Given the size and the value of UTI's investment in RIL, it was but natural that the proportion of equity in US-64 rose from 39 per cent in 1993-94 to 50 per cent in 1994-95. But both the UTI and RIL stress that the two-phase Rs 1,073 crore investment in RIL in 1994 was less than 2 per cent of the total corpus of UTI, even though it accounted for a much higher share of US-64 corpus. What did happen though was that in 1994-95 the Indian stock market saw a flurry of new issues raising a total of Rs 34,700 crore as nearly 1,200 new companies were listed on the Bombay Stock Exchange.

Triggered by the boom in public issues, UTI clearly was drawn in by the euphoria on equity. Secondly the government - in its first essay at disinvestment - managed to lump public-sector unit stocks worth over Rs 6,200 crore onto UTI's books. The sudden inflow of equity saw US-64's equity component rise from 26 per cent to 67 per cent.

It is being argued that if UTI had invested the Rs 1,073 crore in debt and not in the RIL shares in 1994, its value would have doubled by now. The seven-year return on RIL shares is only 92 per cent. But it is also true that at the end of the five-year lock in period, UTI's return on investments in RIL was 243 per cent.

Theoretically, UTI could have sold off all or a large part of its RIL holdings and made a killing. It is another matter though that stock markets could have gone into a tailspin with such large-scale offloading of shares. Between 1998 and 2001, the ratio of equity in US-64 rose from 68 to 70 per cent despite the Deepak Parekh Committee recommendation to reduce equity exposure.

Q. How did investment in public sector shares and the 1998 bail-out affect the UTI?
UTI's exposure to equity increased and return on investment fell. The Union finance minister told Parliament on August 1 that UTI had invested Rs 6,202 crore in PSU shares between 1991 and 1996. Of this, Rs 4,722 crore was from the US-64 portfolio.

Such huge investment in PSU shares pushed UTI's flagship scheme even more into the equity trap. Because of the consistent erosion of the values of PSU shares, the government had to bail out US-64 by buying back Rs 3,300 crore worth of PSU shares in 1998 and putting them in a scheme called SUS-1999. The current value of these shares is around Rs 1,500 crore.

While the bail-out brought down UTI's own holding of PSU shares to Rs 2,900 crore, the market value of these shares too has plummeted to about half.

Q. Did UTI manage its portfolio in a way to maximise returns for small investors?
No. Its size and diversity made the fund unmanageable. Since US-64 held scrips of 1,100 companies, churning the portfolio through timely buying and selling - when only 300 stocks were tracked by UTI - was virtually impossible. However, it did churn its top holdings. For instance, UTI sold over two crore RIL shares between 1999 and 2001 and realised profits of over Rs 400 crore at prices ranging from Rs 380 to Rs 425.

The problem though, is not restricted to equity. UTI has a huge hole in its debt portfolio too. Of the more than Rs 23,900 crore debt portfolio, gross non-performing assets have been pegged at Rs 5,686 crore. The impact of NPAs has been most pronounced on UTI's monthly income plans.