UTI scam

What is the UTI?

• The unit trust of India is the largest mutual fund in the
country created in 1964 trough an act of parliament.

• The UTI was set-up specifically to channel small saving of

citizens into investment giving relatively large interest.

• The US-64 scheme is the largest & has 2 crore investors.

• Besides the US-64 the UTI runs 87 other schemes giving

investors various options.

• US-64 has been most popular, giving returns as high as

18% in 1993 & 94.
 Genisis of the scam
• Liberalization of the economy immediately led to the
liberalization 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 liberalization was pushed by Chidambaram, as the

finance minister of the U F government, who, in 1997,
removed all government nominees from the board of the
UTI.
• As the US-64 does not come under SEBI regulations, its
investment details are kept secret and the chairman has
arbitrary powers to personally decide an investment up to a
huge Rs 40 crores.

• Such ‘liberalization’ is tailor-made for frauds.

• Not surprisingly, within one year of Chidambaram's

liberalization, in 1998, the UTI crashed, and the new BJP-
led government organized 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 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 favors 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 channeled 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 lose half its value
within a year since Feb. 2000.
• 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.

• With knowledge that the UTI was in a state of collapse,

the Chairman organized a high profile propaganda
campaign promoting UTI, while at the same time leaking
information to the big corporate to withdraw their funds.
• 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.

• They were re-purchased at the price of Rs. 14.20 per

share (face value Rs.10) when in fact its actual value was
not more than Rs. 8.

• As a result UTI’s small investors lost a further Rs. 1,300

crores to the big corporate.
• Former UTI chairman P S Subramanyam and two executive directors -
M M Kapur and S K Basu - and a stockbroker Rakesh G Mehta, were
arrested in connection with the 'UTI scam'.

• UTI had purchased 40,000 shares of Cyberspace between September

25, 2000, and September 25, 2000.

• The CBI said it was the conspiracy of these four people which resulted
in the loss of Rs 32 crore (Rs 320 million).

• The promoter of Cyberspace Infosys, Arvind Johari was arrested in

connection with the case.

• The officals were paid Rs 50 lakh (Rs 5 million) by Cyberspace to

promote its shares.

• He also received Rs 1.18 crore (Rs 11.8 million) from the company
through a circuitous route for possible rigging the Cyberspace counter.
 
• 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.

• 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 to Rs 8 and get
interest at a mere 7% on their initial investments.

• Fearing a back-lash, the government later announced the

ability to repurchase UTI shares at Rs. 10 — i.e. at 30 %
below the purchase price.
• Both the union government and the unit trust of India
(UTI) have failed to take any action against tainted
UTI officials, as well as against corporate exposed by
the tarapore committee way back in Jan 2002.