The day UTI went to sleep

On Monday, the 28th of May, after a relaxed week-end, you’d have thought Ajeet Prasad would have been wide awake, but the UTI nominee on the board of the Rs 140-crore Kalyani Steels continued to sleep. And allowed the firm’s management to get away with questionable practices such as slashing interest rates on loans made to the firm’s subsidiaries, giving unsecured loans to them, and even selling financial assets worth Rs 66 crore on credit!

Kalyani’s balance sheet shows the company was raising loans at between 13 and 16 per cent interest, yet it reduced the interest on a Rs 14-crore loan to Gladiolla Investments from 12 per cent to a mere 4 per cent. Similarly, the firm sold financial assets worth Rs 96 crore during the year, but a whopping Rs 66 crore of this was on credit — the assets were transferred, but the payment was to be made at some date in the future. And the UTI nominee on the board allowed this to happen. Similarly, as the company’s auditors state, Rs 31 crore of loans has been lent to subsidiary companies with ‘no stipulations as regards repayment of principal and interest.’

Now it is certainly true the money involved here is peanuts compared to the money UTI lost in other cases such as its investments in Zee and HFCL. Nor, at least right now, is it anyone’s case that the money given by Kalyani to its subsidiaries will disappear in the manner it has in so many other erstwhile bluechip companies. By the way, till July last year, none other than K.G. Vassal was the nominee director on Kalyani’s board — Vassal, you’d recall, was made acting chief of UTI after P.S. Subramanyam was asked to go.

What makes the UTI negligence truly shocking is that this is not the first time a financial institution (FI) has been caught sleeping on a company’s board. In February 1998, the Central Economic Intelligence Bureau discovered that JCT Limited had borrowed Rs 240 crore from FIs and had, in turn, lent this to its subsidiaries of its own named Poly Investment and Chohal Investment (who used this money to buy JCT and other shares). Alarmed by this, the Reserve Bank of India issued a circular to the heads of all FIs, warning them to take their jobs seriously, and that nominee directors should pay close attention to what was happening in companies, and to ensure that money taken for projects was not diverted elsewhere. (Around the same time, JK Corp which had been given Rs 50 crore by FIs, was found to have lent Rs 35 crore of this to subsidiaries like Mayfair Investments who, in turn, lent this to subsidiaries called Ethnic Investments and Sthenic Investments).

The matter was so serious that, as Finance Minister, P. Chidambaram asked for strict action against the FI nominee director and for the money to be brought back — the FI director on JCT’s board was a retired executive, and was removed, and it was found he hadn’t attended board meetings for the past four years! The RBI circular said that in this particular company’s case, the auditors’ note very clearly stated that interest-free loans had been advanced to subsidiary firms, and that the FI nominee had not attended ‘important Board meetings convened to consider the Annual
Accounts.’

The RBI then said the role of nominee directors should be redefined, and they should be made accountable for their omissions and commissions; and that FIs should monitor the health of units they gave loans to, particular to ensure proper use of funds lent to them. It said that companies should be prohibited from ‘granting to their subsidiary companies without prior approval of the Board of Directors, interest free loans or loans at a rate of interest lower than the rate at which company had borrowed from banks/FIs.’ And soon after the RBI instructions, the stock market regulator SEBI also issued instructions that if a company raised public funds, the directors must certify the end-use of these funds in each successive year.

Now it’s very clear from the recent Zee Telefilms and HFCL case (Zee is accused of diverting Rs 340 crore to Ketan Parekh in January to March alone, and HFCL Rs 425 crore) case that these instructions were followed more in the breach. So will some action be taken against the FI nominees on the board of these companies as well?
Postscript: When Finance Minister Yashwant Sinha defended his
ignorance of what was happening in UTI by saying there was no finance ministry nominee on UTI’s board, I asked him if he planned to take action against the FI chiefs (such as the LIC one) since they were on UTI’s board. And clearly went along with everything, including changing the UTI Act to allow freezing of US-64. Sinha ducked the question, saying he would find out if the FI chiefs knew what was happening in UTI. Well, it’s 20 days since this exchange took place, and no action has been taken. Why? If the FI chiefs knew what was happening, they were culpable in the first degree. And if they didn’t, they were still culpable, though in the second degree. The never-ending slumber of the FIs is the real scam, not Ketan Parekh, not Cyberspace, not HFCL, not anything else. And till this is fixed, the scams will keep revisiting us.

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