If it were a raffle, Meleveetil Damodaran would have blamed the number he pulled out on luck. But 5.81 is not a number most Indian investors would have liked to wake up to on December 30. For this was all about trust. And after 37 years, Unit Trust of India (UTI) was, for the first time, telling them that its flagship scheme US-64's Rs 10 unit was worth a mere Rs 5.81. The number that UTI Chairman Damodaran sent across to newspaper offices late on Saturday evening was a reflection of the rot that had set in in India's largest and oldest mutual fund.

BUSINESS ANATOMY OF MISDEEDS A sample of questionable investments of UTI and their diagnoses by the Tarapore Committee JINDAL VIJAYNAGAR STEEL: UTI had not looked into the track record of the promoters or the financials of the company before taking an exposure of Rs 300 crore in the company for the first time. RELIANCE INDUSTRIES: Although UTI's investments in Reliance turned out to profitable, what is of concern is the profit foregone as a result of the terms and conditions entered into while making these investments. ZEE TELEFILMS: Investment neither backed by internal process note nor research. By June 2001, holding had depreciated by Rs 658 crore. GLOBAL TELESYSTEM: Rs 100 crore invested without a report by the equity research cell. The decision not to book profits when the price was high or sell and cut losses when it fell raises doubts. PENTAMEDIA: The equity research cell recommended investing at Rs 1,100 a share. But UTI purchased shares at a much higher rate. HFCL: While offloading its shares in the market to book profits UTI chose to buy approximately the same number of HFCL shares. DSQ SOFTWARE: Value of portfolio fell by Rs 66 crore by June 2000. Investment wasn't backed by equity research or internal process notes. HOW THE ROT SPREAD Most big schemes of UTI have yielded poor returns in the past one year Growth Funds fund size (Rs crore) Return (per cent) Mastershare 927.44 -18.76 Mastergain'92 746.81 -20.59 Master Plus'91 435.63 -21.95 Balanced Funds ULIP 4006.81 -10.52 UTI RBUP 253.71 -5.99 Unit Scheme '95 212.51 -3.70 Income Funds MIP 2000 1,010.50 -15.65 MIP '99 (II) 993.88 -3.72 IISFUS '98 (II) 923.55 -20.59 Since US-64's real value was never known before January 1, 2002 it not possible to calculate its annual return. But the fall in its sale price of Rs 13.60 in June to Rs 5.98 on January 1, 2002 indicates the extent of value erosion.

But if there was no blood on the streets on Monday, it was only thanks to a Government-backed assured return scheme announced by UTI on December 29. Investors holding up to 5,000 units (the earlier ceiling was 3,000 units) could now be assured of getting at least Rs 12 if they held on to their units till May 2003. They could at this stage exit at the administered price of Rs 10.50 for January 2001. The price will rise 10 paise every month till May 2003. For those holding more than 5,000 units, there is a guarantee of receiving at least Rs 10 in May 2003. If they wish to exit now, they would get only the net asset value (NAV) linked price, which inched up to Rs 6.09 on January 2. What helped contain a public outcry was the fact that there were few other investment options before unitholders willing to sell.

The Government will fill the gap between the promised price and the actual worth of the units. Though Rs 22 crore worth of US-64 units got redeemed the first two days, UTI hopes that the assurance of rising return till May 2003 will prevent a rush for redemption. But investors will also keep a sharp eye on the US-64 NAV. For, it is the movement in NAV that will show whether the rot in UTI has been stemmed. A recent report by a committee headed by former RBI deputy governor S.S. Tarapore has outlined how very little was right at the UTI.

For one, UTI made several questionable-if not dubious-investments that have been subjected to a detailed audit. Several of these investments were made without any research and often on the directives of former chairmen. Shares were transferred from one scheme to another in complete disregard of the norms. In 2000-1, purchases and sales by US-64 through inter-schemes transfers amounted to Rs 20,198 crore as against the total investment portfolio of Rs 22,592 crore on June 2001. Such unusually high churning cannot be attributed to legitimate inter-scheme transfers that may be done to reduce transaction costs.

In many cases, advice given by UTI's equity research cell was ignored, while in others, investments were made on the basis of old research reports. No wonder, the Tarapore Committee found many instances of equity investments in which acquisition costs were well above the market prices. Also Rs 2,483 crore was invested in equities of 1,014 thinly traded or unlisted companies.

Most damagingly, the committee found that an institution of the size and history of UTI "did not have a documented, comprehensive and transparent investment policy". Tarapore has also asked for audit of UTI's investment in 70 companies, including Aftek Infosys, Balaji Telefilms, Business India, BPL, Essar Shipping, Jain Studios, Jindal Iron and Steel, Mukta Arts, Pritish Nandy Communications and Shonkh Technologies.

Five months into his job, Damodaran is trying to put the house in order. The full portfolio of US-64 has been disclosed for the first time. "Investors now know all about our investments. They know of our investments in good stocks and have also got to see the junk in the portfolio. There are no uninformed fears now," says Damodaran. Shares of companies in which UTI has a sizeable holding will be put on the block soon. They will be sold to either the existing management or to a new buyer. Foreign companies wanting to hike their shareholding in Indian subsidiaries could also find a willing seller in UTI.

It also plans to get aggressive in recovering Rs 1,000 crore worth of non-performing assets on its books. "Investors should expect to see a clean and transparent organisation soon," claims Damodaran. The financial powers of the chairman have been clipped and a committee has been set up that will take decisions on investments up to Rs 10 crore. Banks and financial institutions are being persuaded to replace their officials on the UTI board with professionals. Damodaran himself has quit the Life Insurance Corporation board.

The three asset management committees are being reconstituted and will have no functional links with the board of trustees. Fund managers and officials at the lower levels have been given powers to take investment decisions.

UTI's troubles, however, are far from over. It still has a highly equity-oriented portfolio which means that the NAV of US-64 will follow the market. Talk of strategic sales has been doing the rounds for some time and UTI will have to show that it means business. Similarly, the management will have to convince investors that past mistakes will not be repeated.

Clearly, there is not much time. As the year proceeds and the assured return rises, investors will come in larger lots to redeem. This could mean a huge drain on the Government which is already poorer by Rs 180 crore till December 2001 and could well add Rs 1,700 crore to that figure by the end of 2002, if the NAV and redemptions remain at the current level.

On his part, Damodaran will be hoping that the market rises in 2002. And so does the trust of investors.