Company Law - CIA III

8/20/2019 Company Law - CIA III

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WHAT IS THE UTI?

UTI was established through a Parliament Act in 1964, to channelize the nation’s savings via

mutual und schemes! This was done as in the earlier da"s, raising the ca#ital rom mar$ets

was ver" diicult or the com#anies due to the #ublic being ver" conservative and ris$

averse! UTI’s distribution networ$ was well s#read out with %4 branch oices, &9% district

re#resentatives and about '%,((( agents across the countr"!

WHAT WAS US-64?

The irst scheme introduced b" UTI was the Unit )cheme*1964, #o#ularl" $nown as U)*64!The und’s initial ca#ital o +s % crore was contributed b" +eserve an$ o India -+I.,

/inancial Institutions, 0ie Insurance or#oration -0I., )tate an$ o India -)I. and other

scheduled ban$s including ew oreign ban$s! It was an o#en*ended scheme, #romising an

attractive income, read" li2uidit" and ta3 beneits! In the irst "ear o its launch, U)*64

mobilized +s 19 crore and oered a 6!1 dividend as com#ared to the #revailing ban$

de#osit interest rates o 5!'% * 6! This im#ressed the average Indian investor who until then

considered ban$ de#osits to be the saest and best investment o##ortunit"! U)*64 has been

most #o#ular, giving returns as high as 1 in 1995 and 1994!

INTRODUCTION OF THE SCAM

The Unit Trust o India is the largest mutual und in the countr" created in 1964 through an

act o Parliament! UTI7s scheme o U)*64 was set*u# s#eciicall" to channel small savings o

citizens into investments giving res#ectable returns8interest!

The U)*64 scheme had & crore investors, the bul$ o whom were small savers, retired #eo#le,

widows and #ensioners! U)*64 has been most #o#ular, giving returns as high as 1 in 1995

and 1994! In 199, the UTI crashed, and the P*led :;A government organised +s! 5,%((

crore bail*outs to UTI! P <overnment a##ointed P!)! )ubraman"am as the new UTI chie,

as he had the bac$ing o the P=>! It was also said that a"alalitha had #ressurized the :;A

government or a##ointing )ubraman"am, in lieu o her continuing su##ort to the entre!

)ubraman"am strengthened his relationshi# with cor#orate big*wigs with the hel# o )mall



investor’s unds de#osited with UTI, showered avours on <overnment avorites’, and

invested huge amounts in ?un$ bonds! In August &(((, ater #rices o sotware stoc$s had

begun to crash, )ubraman"am -UTI. #urchased 5!4% la$h shares o a relativel" un$nown

com#an" @"bers#ace Inos"s 0td!@ at a huge #rice o +s! 95( #er share!

Initiall" the UTI hierarch" had o##osed #urchase but subse2uentl", ater our da"s, agreed to

the #urchase! In less than a "ear7s time, the share #rice #lummeted to ?ust +e! 1! This

investment, cou#led with other shodd" investments, resulted in staggering inancial losses to

the UTI and investors! ithin no time the bigwigs redeemed their investments with UTI,

amounting to +s! 4,((( crore!

The shameul #art is that the" were re*#urchased at the #rice o +s! 14!&( #er unit -ace value

+s!1(., when in act its actual value -net asset value. was not more than +s! ! As a result,

UTI’s small investors lost a sum o +s! 1,5(( crore!

GENESIS OF THE SCAM

0iberalisation o the econom" immediatel" led to the liberalisation o the UTI! hen

liberalisation was urther #ushed in 199', the /inance =inistr" removed all government

nominees rom the board o the UTI! esides, the U)*64 does not come under )BI

regulations, its investment details are $e#t secret and the chairman has arbitrar" #owers to

#ersonall" decide an investment u# to a huge sum o +s 4( crores! The UTI continued to

#urchase inamous C*1( list o Ceten Pare$h stoc$, such as Dimachal /uturistic, Eee

Teleilms, <lobal Tele, ;)F, etc! shares even when their mar$et value began to crash in mid*

&(((, in order to #ro# u# the share values o these stoc$s!

The UTI also invested in ?un$ bonds li$e Pritish :and" communications -+s! 1!% crores., ain

)tudios -+s!% crores., etc! This amounted to nothing but handing over #eo#le’s investments to

the rich and #owerul! Thereb" thousands o crores were si#honed o to big business and

#rominent individuals, with the UTI chairman, bureaucrats and #oliticians ta$ing their cuts!

ith $nowledge that the UTI was in a state o colla#se, the hairman organised a high

#roile #ro#aganda cam#aign #romoting UTI while at the same time lea$ing inormation to

the big cor#orates to withdraw their unds! The hairman thereb" du#ed the la$hs o small

investors through alse #ro#aganda!



>n ul" 4, &((1 the board o UTI too$ the ste# o reezing the #urchase and sale o all U)*64

UTI shares or si3 months! )imultaneousl" it declared a #athetic dividend o ', which is

even lower than the interests o the ban$s and #ost oice saving schemes! In other words the

& crore shareholders could not re*invest their mone" elsewhere G and would have to

#assivel" see their share #rice erode rom +s! 14 to +s !

In the wa$e o these develo#ments, )ubraman"am was orced to resign! /inance =inistr" did

not order a #robe into what went wrong with the investment #attern o the U)*64, which

resulted in the sus#ension o the scheme and loss to small investors!

INVESTIGATION

oth the Union government and the Unit Trust o India -UTI. have ailed to ta$e an" action

against UTI oicials, as well as against cor#orates e3#osed b" the Tara#ore committee wa"

bac$ in anuar" &((&! The inal P re#ort had recommended an en2uir" o the secondar"

mar$et transactions done b" UTI in shares o 9 com#anies identiied b" the Tara#ore

committee! It had also recommended de#artmental action against UTI oicials involved in

ubers#ace )cam! =oreover, Tara#ore #anel had e3#osed the deals behind the U)*64 crisis

and how ban$s had #riv" inormation regarding the ill*health o the scheme!

Dowever, in terms o action ta$en against these indings, both the government and UTI have

ailed to inalise an" #roceedings against the accused other than reerring a ew cases to the

Advisor" oard on an$ing, ommercial and /inancial /rauds, a #re*investigative bod"

under the inance ministr"! )ome o the com#anies involved in these cases include <lobal

Tele, ;)F )otware, Bssar >il, Eee Teleilms, Bssar )teel and D/0! Ater the Tara#ore

ommittee re#ort unearthed the deals between UTI oicials and leading cor#orates, UTI

ordered an audit o the investment decisions ta$en in 19 irms! ut no action has been ta$en

against these com#anies or against the concerned UTI oicials!

LEGAL ACTION

/earing a run on the institution and #ossible im#act on the whole mar$et <overnment came

out with a rescue #ac$age and change o management in &((1!The UTI Act was re#ealed and

the institution was biurcated into two #arts UTI =utual /und was created as a )BI

registered und li$e an" other mutual und! The assets and liabilities were ta$en over directl"



b" the <overnment in a new entit" called )#eciied Underta$ing o UTI, )UUTI! In order to

distance <overnment rom running a mutual und the ownershi# was transerred to our

institutionsH namel" )I, 0I, > and P:, each owning &%! ertain reorms li$e

im#roving the salar" rom P)U levels and eecting a +) were carried out!

PROCEEDINGS

Arvind ohari, #romoter o 0uc$now based "bers#ace Inos"s 0td! held on the charge o

misa##ro#riating unit trust o India unds to the tune o +s! 5&!( crore, on conditional bail

b" a s#ecial court! The designated ?udge, ) + =ehra, released him on bail in the sum o +s!

'!% la$h with one or two sureties o the li$e amount! In the alternative, ohari was allowed to

urnish cash bail o +s! '!% la$h! The registrar o the court was directed to issue an urgent

memo to the su#erintendent o central #rison to hand over the custod" o ohari to the I so

that he could be ta$en to 0uc$now or #roduction in another case #ending against him! De

was restrained rom visiting oices o UTI and inancial institutions such as 0I, <I, )I

ca#ital mar$et and )B!

ohari7s law"er =ahesh ethmalani argued that his client was in custod" since ul" &4 and

had coo#erated with the investigating agenc"! Dis custodial interrogation was not re2uired

because documents had alread" been seized b" the I! I #rosecutor, <o#al )haran, on

the other hand, argued that ohari was the brain behind the UTI scam and would tam#er with

evidence i bail was granted! Dis role vis*a*vis co*accused and his ne3us with other #ersons

or #ublic inancial institutions could be unearthed even i ohari was not in custod", the ?udge

elt! @I am thereore inclined to grant him bail on certain terms and conditions,@ remar$ed

s#ecial ?udge )!+! =ehra! The ?udge, however, made it clear that i ohari sought bail romthe magistrate7s court in 0uc$now he should ma$e himsel available to the I in =umbai as

and when re2uired in the UTI scam case! Pursuing case dairies and remand a##lication, the

?udge remar$ed, @The" show that investigation is #rogressive and regular!@

The court granted bail to co*accused, P!)! )ubraman"am -/ormer UTI chairman., )!C! asu

and =!=! Ca#ur -sus#ended UTI e3ecutive directors. and bro$er +a$esh =ehta! The accused

are charged with cons#irac" to cause wrongul loss to UTI to the tune o +s! 5& crore b"



subscribing to 5,4%,((( shares o m8s "bers#ace Inos"s in a #rivate #lacement at an

e3orbitant #rice o +s! 95( #er share!

I alleged that UTI oicials, )ubraman"am, Ca#ur and asu had allegedl" reversed their

own decision ta$en earlier to re?ect the oer o bu"ing these shares! The agenc" alleged that

ohari had #aid +s! %( la$h bribe to these oicials through bro$er +a$esh =ehta to stri$e the

deal! >##osing his bail, the I said that ohari was the main brain behind the entire

cons#irac" and had masterminded misa##ro#riation o unds to the tune o rs 5&!( crore! !

NEW START

UTI lost its mar$et dominance ra#idl" and b" end o &((%, when the new share*holders

actuall" #aid the consideration mone" to <overnment its mar$et share had come down to

close to 1(! A new board was constituted and a new management inducted )"stematic stud"

o its #roblems role and unctions were carried out with the hel# o a re#uted international

consultant! /resh talent was recruited rom the #rivate mar$etH organizational structure was

changed to ocus on newl" emerging investor and distributor grou#s and massive changes in

investor services and unds management carried out! >nce again UTI has emerged as a

serious #la"er in the industr"! )ome o the unds have won amous awards, including the est

Inra /und globall" rom 0i##er! UTI has been able to benchmar$ its em#lo"ee com#ensation

to the best in the mar$et, has introduced Perormance +elated Pa"outs and B)>Ps!

Company Law - CIA III

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