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RBI, FIs must divest control of UTI: JPC

Blaming IDBI for showing "extreme irresponsibility" on certain management issues of Unit Trust of India, the Joint Parliamentary Committee probing the stock scam has asked the financial institutions and other trustees -- RBI, LIC and SBI -- to divest their control from the country's biggest mutual fund.

"It is IDBI that is accountable for the omissions and commissions of UTI as an institution. IDBI should be divested of the trusteeship and control of UTI as well as powers given to it under UTI Act," JPC said in its draft report.

JPC also said that State Bank of India, Life Insurance Corporation and other financial institutions, which have floated their own mutual funds, should be divested of the trusteeship and control of UTI, as it led to "conflict of interests".

"Reserve Bank of India, whose job is of a regulator, should be divested of its responsibilities as a trustee of UTI," it added.

Though IDBI controlled UTI had powers to ask for informations as per the provisions in UTI Act, the JPC said: "IDBI exhibited extreme irresponsibility by not invoking these sections of UTI Act in the last 10 years."

The report further said that although IDBI started its own mutual fund, it continued to dominate the affairs of UTI despite the "obvious conflict of interest".

Referring to the S S Tarapore panel report, the Committee criticised members of UTI's board of trustees for "gross negligence" and "violation" of prudential norms to declare dividends from the fund's reserves for four successive years to the extent that the reserves became negative.

UTI's reserves and surplus turned to a negative Rs 10.98 billion mainly due to payment of high dividends during 1994-98.

Pointing to the UTI fiasco, the JPC recommended that suitable action should be taken against the trustees of UTI for improper decision in distributing dividends out of reserves for four successive years.

Suitable action should be taken against the members of executive committee who sanctioned assured return schemes without conducting any study about their viability or trying to find if they adhered to mutual fund regulations and in turn misled Sebi about financial position of these schemes, it added.

Lambasting IDBI and other trustees for allowing UTI to invest in long-term projects, the report said participation of UTI in banking and term lending activities did not fit into its mutual fund functions as such investments invariably had long gestations while UTI needed liquid funds to finance redemptions and make payments on its various schemes.

The report further said: "Over time UTI got into mismatch problem. If it was a pure mutual fund, it would not have got into some of these (long-term) investments."

On the role of other trustees, the JPC said "both LIC and SBI floated their own mutual funds but chose to retain their representatives on the Board of Trustees of UTI despite the conflict of interest."

"SBI redeemed US-64 units worth Rs 3.55 billion, the largest redemption by a single entity, which was one of the contributory factors to the heavy redemption pressure on US-64 scheme," it said.

Since SBI had a nominee in the Board of Trustees, the committee said: "This leads to doubts that SBI had inside information about US-64, prompting the redemptions."

Despite Tarapore Committee's clean chit to SBI, the JPC report said: "The incidents highlights the anomaly of an institution, which is a competitor, client as well as a banker of UTI, being on the Board of Trustees."

Although RBI, which had "greater responsibility" in UTI, had requested the Centre to disassociate it from the working of the fund, JPC said, "it seems that though the government agreed with this suggestion, it has till date not implemented."

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