By Ranjit Devraj
NEW DELHI, Aug 3 2001 (IPS)

The scandal-ridden, right-wing coalition government of Prime Minister Atal Bihari Vajpayee is at risk of coming apart following the near-collapse of a once-popular, state- run mutual fund due to dubious investments.

Earlier this week, Vajpayee offered to resign after a key ally, the pro-Hindu, Shiv Sena (God’s Army) party, suggested in Parliament that members of his family were involved in dealings which led to the Unit Trusts of India (UNI) suspending transactions of its main scheme.

Sanjay Nirupam, a vocal Shiv Sena member, said investigations needed to be made into allegations that Vajpayee’s relations influenced a seven million dollar investment made by the UTI in “Cyberspace”, a fly-by-night operator.

Vajpayee denied involvement by his family in Parliament and said he was prepared for an investigation. Privately, he also offered to resign saying the coalition was not longer holding.

Coalition partners prevailed on Vajpayee, considered the moderate face in his pro-Hindu Bharatiya Janata Party (BJP), to stay on. But opposition groups in Parliament brought relentless pressure on the government to agree to an-all party-probe into the scam.

On Thursday, Finance Minister Yashwant Sinha rejected repeated calls in Parliament for his resignation and refused to entertain opposition demands for a Joint Parliamentary Committee (JPC) to probe UTI, which holds 20 million accounts.

But by Friday, the government was forced into agreeing to allow an existing JPC — formed to investigate a securities scam involving bull operator Ketan Parekh that led to a stock market meltdown in April — to also look into UTI dealings.

The stock market meltdown contributed to a serious value erosion in UTI and stimulated the rush for redemptions. Parekh was later arrested and his funds traced to Swiss banks. These funds were then ordered frozen.

Opposition parties, including the Congress, are not satisfied with the government move and are demanding a separate JPC which would deal specifically with the UTI scam..

“We want a new JPC which can work to safeguard the interests of millions of small investors in the future,” said Madhav Rao Scindia, senior Congress party leader on Friday.

“We will continue to insist on the resignation of Yashwant Sinha as finance minister both inside and outside the house,” said Priyaranjan Das Munshi, chief whip of the Congress party in the Lok Sabha or lawmaking lower house,

On Jul. 2, then UTI chairman P.S. Subramanyam ordered a freeze on transactions in the flagship US-64 scheme after big-time holders in the fund suddenly resorted to massive redemptions — allegedly after being tipped off by insiders.

According to J Bhagwati, a senior official in the finance ministry, between April and May alone big corporations redeemed an estimated 100 million dollars.

That left many small investors, who preferred putting their money in a government fund rather than in the stock market, in the lurch. “I thought a government-owned fund was safe even if the returns were modest,” said S M Gupta, an investor in UTI since 1964.

On Friday, a court in the eastern port city of Mumbai rejected the bail application of Subramanyam, who was arrested on charges of corruption soon after his sacking as UTI chairman on Jul. 3.

During a debate in Parliament, Sinha claimed he was kept in the dark all along by Subramanyam. Sinha denied ordering his arrest, which was carried out by the Central Bureau of Investigation (CBI), the country’s premier sleuthing agency.

Said former finance minister and senior Congress leader, Manmohan Singh: “I am pained that one of the highest functionaries of the financial system (Subramanyam) was arrested and nobody knows who ordered his arrest.”

Sinha’s insistence that following liberalisation, the government had relinquished control over the functioning of the UTI, did not wash. It only drew further demands that it be brought under the control of Parliament.

“It is a matter of regret that Parliament, which created financial monsters like the UTI, now has little control over their management,” said Fali Nariman, a distinguished jurist and member of the Rajya Sabha (upper house).

According to Arun Kumar, professor of economics at the prestigious Jawharlal Nehru University (JNU), the real significance of the crisis lies in the erosion of the confidence the public has in government-backed financial instruments like the UTI.

“These instruments of small savings were created over time to move the savings of the upper classes from unproductive assets (like gold and real estate) to productive ones,” Kumar said.

UTI and other financial institutions have in the past come to the aid of the government to intervene in the markets and boost sentiment when required, especially after budgets are announced.

“Such interventions have increased after 1991 (when India began its liberalisation programme) because the markets have become the barometres of economic health,” Kumar said.

Kumar expressed fears that the crisis of confidence created by the UTI fiasco would reduce the saving and investment rate and lead to a leakage of funds from the national economy to foreign shores.

Excerpt: