Everyone is nervous on interviews. If you simply allow yourself to feel nervous, you'll do much better. Remember also that it's difficult for the interviewer as well.
In general, be upbeat and positive. Never be negative.
Rehearse your answers and time them. Never talk for more than 2 minutes straight.
Don't try to memorize answers word for word. Use the answers shown here as a guide only, and don't be afraid to include your own thoughts and words. To help you remember key concepts, jot down and review a few key words for each answer. Rehearse your answers frequently, and they will come to you naturally in interviews.
As you will read in the accompanying report, the single most important strategy in interviewing, as in all phases of your job search, is what we call: "The Greatest Executive Job Finding Secret." And that is...
Find out what people want, than show them how you can help them get it.
Find out what an employer wants most in his or her ideal candidate, then show how you meet those qualifications.
In other words, you must match your abilities, with the needs of the employer. You must sell what the buyer is buying. To do that, before you know what to emphasize in your answers, you must find out what the buyer is buying... what he is looking for. And the best way to do that is to ask a few questions yourself.
You will see how to bring this off skillfully as you read the first two questions of this report. But regardless of how you accomplish it, you must remember this strategy above all: before blurting out your qualifications, you must get some idea of what the employer wants most. Once you know what he wants, you can then present your qualifications as the perfect “key” that fits the “lock” of that position.
• Other important interview strategies:
• Turn weaknesses into strengths (You'll see how to do this in a few moments.)
• Think before you answer. A pause to collect your thoughts is a hallmark of a thoughtful person.
As a daily exercise, practice being more optimistic. For example, try putting a positive spin on events and situations you would normally regard as negative. This is not meant to turn you into a Pollyanna, but to sharpen your selling skills. The best salespeople, as well as the best liked interview candidates, come off as being naturally optimistic, "can do" people. You will dramatically raise your level of attractiveness by daily practicing to be more optimistic.
Be honest...never lie.
Keep an interview diary. Right after each interview note what you did right, what could have gone a little better, and what steps you should take next with this contact. Then take those steps. Don't be like the 95% of humanity who say they will follow up on something, but never do.
About the 64 questions...
You might feel that the answers to the following questions are “canned”, and that they will seldom match up with the exact way you are asked the questions in actual interviews. The questions and answers are designed to be as specific and realistic as possible. But no preparation can anticipate thousands of possible variations on these questions. What's important is that you thoroughly familiarize yourself with the main strategies behind each answer. And it will be invaluable to you if you commit to memory a few key words that let you instantly call to mind your best answer to the various questions. If you do this, and follow the principles of successful interviewing presented here, you're going to do very well.
Good luck...and good job-hunting!
Friday, July 22, 2011
How to Answer The 64 Toughest Interview Questions
THIS BOOK IS DESIGNED TO PROVIDE ACCURATE INFORMATION ON THE SUBJECTS COVERED. HOWEVER, IT IS DONE WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING OR PROFESSIONAL SERVICES. IF LEGAL ADVICE OR OTHER PROFESSIONAL ASSSTANCE IS REQUIRED, THE SERVICES OF A COMPETENT, PROFESSIONAL PERSON SHOUID BE SOUGHT. ANY NAMES USED IN THE TEXT ARE FICTITIOUS AND FOR ILLUSTRATIVE PURPOSES ONLY. ANY RESEMBLANCE TO ACTUAL PERSONS OR COMPANIES IS PURELY COINCIDENTAL AND UNINTENTIONAL.
Dedication:
This report is dedicated to courage and knowledge,
the two qualities most needed
to succeed in any human challenge,
especially a job search.
Table of Contents
General Guidelines in Answering Interview Questions 3
Q1 Tell me about yourself. 5
Q2 What are your greatest strengths? 6
Q3 What are your greatest weaknesses? 6
Q4 Tell me about something you did – or failed to do – that you now feel a little ashamed of. 7
Q5 Why are you leaving (or did you leave) this position? 8
Q6 The “Silent Treatment” 9
Q7 Why should I hire you? 9
Q8 Aren’t you overqualified for this position? 10
Q9 Where do you see yourself five years from now? 11
Q10 Describe your ideal company, location and job. 12
Q11 Why do you want to work at our company? 12
Q12 What are your career options right now? 12
Q13 Why have you been out of work so long? 13
Q14 Tell me honestly about the strong points and weak points of your boss (company, management team, etc.)… 13
Q15 What good books have you read lately? 14
Q16 Tell me about a situation when your work was criticized. 14
Q17 What are your outside interest? 15
Q18 The “Fatal Flaw” question 15
Q19 How do you feel about reporting to a younger person (minority, woman, etc)? 16
Q20 On confidential matters… 16
Q21 Would you lie for the company? 17
Q22 Looking back, what would you do differently in your life? 17
Q23 Could you have done better in your last job? 18
Q24 Can you work under pressure? 18
Q25 What makes you angry? 18
Q26 Why aren’t you earning more money at this stage of your career? 19
Q27 Who has inspired you in your life and why? 19
Q28 What was the toughest decision you ever had to make? 20
Q29 Tell me about the most boring job you’ve ever had. 20
Q30 Have you been absent from work more than a few days in any previous position? 20
Q31 What changes would you make if you came on board? 21
Q32 I’m concerned that you don’t have as much experience as we’d like in… 21
Q33 How do you feel about working nights and weekends? 22
Q34 Are you willing to relocate or travel? 23
Q35 Do you have the stomach to fire people? Have you had experience firing many people? 23
Q36 Why have you had so many jobs? 24
Q37 What do you see as the proper role/mission of… …a good (job title you’re seeking); …a good manager; …an executive in serving the community; …a leading company in our industry; etc. 25
Q38 What would you say to your boss if he’s crazy about an idea, but you think it stinks? 25
Q39 How could you have improved your career progress? 26
Q40 What would you do if a fellow executive on your own corporate level wasn’t pulling his/her weight…and this was hurting your department? 26
Q41 You’ve been with your firm a long time. Won’t it be hard switching to a new company? 27
Q42 May I contact your present employer for a reference? 27
Q43 Give me an example of your creativity (analytical skill…managing ability, etc.) 28
Q44 Where could you use some improvement? 28
Q45 What do you worry about? 28
Q46 How many hours a week do you normally work? 28
Q47 What’s the most difficult part of being a (job title)? 29
Q48 The “Hypothetical Problem” 29
Q49 What was the toughest challenge you’ve ever faced? 29
Q50 Have you consider starting your own business? 30
Q51 What are your goals? 31
Q52 What do you for when you hire people? 31
Q53 Sell me this stapler…(this pencil…this clock…or some other object on interviewer’s desk). 31
Q54 “The Salary Question” – How much money do you want? 33
Q55 The Illegal Question 33
Q56 The “Secret” Illegal Question 34
Q57 What was the toughest part of your last job? 35
Q58 How do you define success…and how do you measure up to your own definition?. 35
Q59 “The Opinion Question” – What do you think about …Abortion…The President…The Death Penalty…(or any other controversial subject)? 36
Q60 If you won $10 million lottery, would you still work? 36
Q61 Looking back on your last position, have you done your best work? 37
Q62 Why should I hire you from the outside when I could promote someone from within? 37
Q63 Tell me something negative you’ve heard about our company… 38
Q64 On a scale of one to ten, rate me as an interviewer. 38
Dedication:
This report is dedicated to courage and knowledge,
the two qualities most needed
to succeed in any human challenge,
especially a job search.
Table of Contents
General Guidelines in Answering Interview Questions 3
Q1 Tell me about yourself. 5
Q2 What are your greatest strengths? 6
Q3 What are your greatest weaknesses? 6
Q4 Tell me about something you did – or failed to do – that you now feel a little ashamed of. 7
Q5 Why are you leaving (or did you leave) this position? 8
Q6 The “Silent Treatment” 9
Q7 Why should I hire you? 9
Q8 Aren’t you overqualified for this position? 10
Q9 Where do you see yourself five years from now? 11
Q10 Describe your ideal company, location and job. 12
Q11 Why do you want to work at our company? 12
Q12 What are your career options right now? 12
Q13 Why have you been out of work so long? 13
Q14 Tell me honestly about the strong points and weak points of your boss (company, management team, etc.)… 13
Q15 What good books have you read lately? 14
Q16 Tell me about a situation when your work was criticized. 14
Q17 What are your outside interest? 15
Q18 The “Fatal Flaw” question 15
Q19 How do you feel about reporting to a younger person (minority, woman, etc)? 16
Q20 On confidential matters… 16
Q21 Would you lie for the company? 17
Q22 Looking back, what would you do differently in your life? 17
Q23 Could you have done better in your last job? 18
Q24 Can you work under pressure? 18
Q25 What makes you angry? 18
Q26 Why aren’t you earning more money at this stage of your career? 19
Q27 Who has inspired you in your life and why? 19
Q28 What was the toughest decision you ever had to make? 20
Q29 Tell me about the most boring job you’ve ever had. 20
Q30 Have you been absent from work more than a few days in any previous position? 20
Q31 What changes would you make if you came on board? 21
Q32 I’m concerned that you don’t have as much experience as we’d like in… 21
Q33 How do you feel about working nights and weekends? 22
Q34 Are you willing to relocate or travel? 23
Q35 Do you have the stomach to fire people? Have you had experience firing many people? 23
Q36 Why have you had so many jobs? 24
Q37 What do you see as the proper role/mission of… …a good (job title you’re seeking); …a good manager; …an executive in serving the community; …a leading company in our industry; etc. 25
Q38 What would you say to your boss if he’s crazy about an idea, but you think it stinks? 25
Q39 How could you have improved your career progress? 26
Q40 What would you do if a fellow executive on your own corporate level wasn’t pulling his/her weight…and this was hurting your department? 26
Q41 You’ve been with your firm a long time. Won’t it be hard switching to a new company? 27
Q42 May I contact your present employer for a reference? 27
Q43 Give me an example of your creativity (analytical skill…managing ability, etc.) 28
Q44 Where could you use some improvement? 28
Q45 What do you worry about? 28
Q46 How many hours a week do you normally work? 28
Q47 What’s the most difficult part of being a (job title)? 29
Q48 The “Hypothetical Problem” 29
Q49 What was the toughest challenge you’ve ever faced? 29
Q50 Have you consider starting your own business? 30
Q51 What are your goals? 31
Q52 What do you for when you hire people? 31
Q53 Sell me this stapler…(this pencil…this clock…or some other object on interviewer’s desk). 31
Q54 “The Salary Question” – How much money do you want? 33
Q55 The Illegal Question 33
Q56 The “Secret” Illegal Question 34
Q57 What was the toughest part of your last job? 35
Q58 How do you define success…and how do you measure up to your own definition?. 35
Q59 “The Opinion Question” – What do you think about …Abortion…The President…The Death Penalty…(or any other controversial subject)? 36
Q60 If you won $10 million lottery, would you still work? 36
Q61 Looking back on your last position, have you done your best work? 37
Q62 Why should I hire you from the outside when I could promote someone from within? 37
Q63 Tell me something negative you’ve heard about our company… 38
Q64 On a scale of one to ten, rate me as an interviewer. 38
5.6 Market Manipulation
The 1990s have seen a number of episodes of alleged market manipulation in the equities
market. Shah and Thomas (2001) identify eight significant episodes of alleged market
manipulation during the 1990s in the Indian stock markets. There can be some difference of
opinion on how many major market manipulation episodes have taken place because there is
a tendency among Indian policy makers to regard a large price swing as market manipulation
even if it is only a speculative bubble or even if it is justified by fundamentals. Nevertheless,
there is no denying that many of the episodes enumerated by Shah and Thomas do provide
cause for concern.
In my view, the single most important culprit for the frequency and severity of such episodes
is the strong restrictions on short selling that exist in India. All institutions (including banks,
financial institutions, mutual funds and foreign institutional investors) are prohibited from
short selling in the Indian capital market. This restriction has been in place for a long time,
but the restriction has become more serious with the progressive institutionalisation of the
capital market in the 1990s. Over a period of time, therefore, an increasingly large and
important segment of the market has been precluded from short selling. Moreover, at various
critical junctures (most recently in March 2001), the regulators have moved to impose a total
ban on short selling by all investors.
To understand why short selling restrictions are so important, we must first note that almost
all the episodes enumerated by Shah and Thomas involve alleged attempts by the companies
and their promoters to rig up the share prices of their own companies. In a free market, the
most powerful weapon against such attempts would be aggressive short selling by rational
investors. In the presence of short sale restrictions, however, the best that rational investors
can do is to sell all their holdings. Once they have done so, they make no further contribution
to price discovery. Market prices are then determined by the alleged manipulators and less
rational investors (momentum investors and passive /indexed investors). It now becomes
evident that short sale restrictions constitute an open invitation to promoters and© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
19
managements to rig up the share prices of their own companies. Perhaps inadvertently, the
regulatory regime has come to fulfil the fondest dream of these market manipulators.
Even if it were argued that some of these episodes are non-manipulative market crashes, short
sale restrictions would be an important explanation for their number and severity. Recent
studies in the United States (Hong and Stein, 2001) argue that short sale restrictions in that
country are responsible for the high frequency of market crashes there. The mechanism is the
same as that described above – short sale restrictions prevent rational bearish investors from
contributing to price discovery in the build up to the crash. These studies are all the more
important because part of the justification for short sale restrictions in India is derived from
the fact that the United States has similar restrictions. It is often forgotten that the United
States introduced these restrictions as a misguided knee jerk reaction to the great depression,
and has merely persisted with that mistake. More importantly, if our markets are more
susceptible to market manipulations than the US market, we should move more aggressively
to remove these restrictions and pro-actively facilitate short selling.
In the United States itself, the scandals surrounding the bankruptcy of Enron have tarnished
the reputations of the Securities and Exchange Commission (SEC), the Financial Accounting
Standards Board (FASB), the auditors, the rating agencies, the analysts, the boards, the
financial press and almost every other element of the regulatory regime. The one group that
has come out with flying colours is the lowly short seller who kept pointing at the skeletons
in Enron’s cupboard when everybody else was intent on turning the other way. It is now
apparent that even the United States would therefore benefit from relying on the market
forces represented by the short sellers to police its markets.
Another important factor is the unwillingness of the stock exchanges and the regulators to
embrace modern software tools for market surveillance and investigation. Despite a longstanding effort to implement stock watch systems, the stock exchanges have yet to make
these systems fully effective. Most of the investigations into alleged market irregularities also
fail to embrace the tools of information technology. There is a large pool of software talent in
the country that could develop modern neural network and artificial intelligence tools that
could leapfrog the best in the world. This has not happened.
There has been a tendency to imitate the US model of market surveillance without
recognising that within the US itself, there is considerable disquiet about the model. This was
true even before the Enron scandal. As Oesterle (2000) points out in an incisive analysis:
“Although the U.S. securities markets are the world’s largest and most liquid, it does not
follow that the regulatory system has been an unqualified success. Strong economic
fundamentals have created and sustained financial markets, not NYSE policing of its
floor traders. … A fairer assessment is that the SRO regime has proved to be barely
adequate at best. … During quiet periods, the SEC largely relies on SROs to police
trading floors, and it routinely approves SRO rules and disciplinary decisions. In other
words, the SEC during such periods tends to be lazy and complacent. When a scandal
breaks in a trading market, there is embarrassment and handwringing over why the
exchange involved was not more vigilant in disciplining its members. The exchange
contritely proposes minor rule modifications, often at the SEC’s insistence, leaving the
exchange’s functions and membership largely intact. The SEC approves the changes and,© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
20
with some fanfare, the regulators and the regulated hail the virtues of the SRO system—
until the next scandal. In recent years the SEC has not been able to resist the temptation
to tinker too much with the rules of the exchanges. But the illusion that the SEC is
guaranteeing the integrity of exchanges removes an incentive for the exchanges
themselves to exercise diligence, lest they lose their customers. And customers are lulled
into a false sense of security, believing the SEC is closely policing the day-to-day
activities of the exchanges.”
There is a need to rethink the entire dirigiste model of regulatory surveillance and rely more
on countervailing power in the market place. Abolition of short sale restrictions is one way of
bringing countervailing power to bear. Another important step is greater transparency and
disclosure. Using modern artificial intelligence methods it should be possible for the trading
system to automatically generate alerts about suspicious trading patterns and price/volume
trends. Rather than feed these alerts to a set of error-prone human surveillance officials (with
potentially perverse incentives), these alerts should be publicly disseminated. By doing so,
the information is placed in the hands of those who have every incentive to take corrective
actions. If an automated surveillance alert indicates possible bear manipulation, the bulls are
immediately forewarned to protect their own interests. These forewarned investors become a
countervailing power to the power of the would-be manipulators. Such an approach would
reduce the role of human discretion and replace this discretion by the impersonal logic of
computing systems and free markets. This approach would also reduce the agency costs
associated with the regulatory approach. I would argue that India with its abundant software
talent is uniquely positioned to lead the world in such a process of development.
market. Shah and Thomas (2001) identify eight significant episodes of alleged market
manipulation during the 1990s in the Indian stock markets. There can be some difference of
opinion on how many major market manipulation episodes have taken place because there is
a tendency among Indian policy makers to regard a large price swing as market manipulation
even if it is only a speculative bubble or even if it is justified by fundamentals. Nevertheless,
there is no denying that many of the episodes enumerated by Shah and Thomas do provide
cause for concern.
In my view, the single most important culprit for the frequency and severity of such episodes
is the strong restrictions on short selling that exist in India. All institutions (including banks,
financial institutions, mutual funds and foreign institutional investors) are prohibited from
short selling in the Indian capital market. This restriction has been in place for a long time,
but the restriction has become more serious with the progressive institutionalisation of the
capital market in the 1990s. Over a period of time, therefore, an increasingly large and
important segment of the market has been precluded from short selling. Moreover, at various
critical junctures (most recently in March 2001), the regulators have moved to impose a total
ban on short selling by all investors.
To understand why short selling restrictions are so important, we must first note that almost
all the episodes enumerated by Shah and Thomas involve alleged attempts by the companies
and their promoters to rig up the share prices of their own companies. In a free market, the
most powerful weapon against such attempts would be aggressive short selling by rational
investors. In the presence of short sale restrictions, however, the best that rational investors
can do is to sell all their holdings. Once they have done so, they make no further contribution
to price discovery. Market prices are then determined by the alleged manipulators and less
rational investors (momentum investors and passive /indexed investors). It now becomes
evident that short sale restrictions constitute an open invitation to promoters and© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
19
managements to rig up the share prices of their own companies. Perhaps inadvertently, the
regulatory regime has come to fulfil the fondest dream of these market manipulators.
Even if it were argued that some of these episodes are non-manipulative market crashes, short
sale restrictions would be an important explanation for their number and severity. Recent
studies in the United States (Hong and Stein, 2001) argue that short sale restrictions in that
country are responsible for the high frequency of market crashes there. The mechanism is the
same as that described above – short sale restrictions prevent rational bearish investors from
contributing to price discovery in the build up to the crash. These studies are all the more
important because part of the justification for short sale restrictions in India is derived from
the fact that the United States has similar restrictions. It is often forgotten that the United
States introduced these restrictions as a misguided knee jerk reaction to the great depression,
and has merely persisted with that mistake. More importantly, if our markets are more
susceptible to market manipulations than the US market, we should move more aggressively
to remove these restrictions and pro-actively facilitate short selling.
In the United States itself, the scandals surrounding the bankruptcy of Enron have tarnished
the reputations of the Securities and Exchange Commission (SEC), the Financial Accounting
Standards Board (FASB), the auditors, the rating agencies, the analysts, the boards, the
financial press and almost every other element of the regulatory regime. The one group that
has come out with flying colours is the lowly short seller who kept pointing at the skeletons
in Enron’s cupboard when everybody else was intent on turning the other way. It is now
apparent that even the United States would therefore benefit from relying on the market
forces represented by the short sellers to police its markets.
Another important factor is the unwillingness of the stock exchanges and the regulators to
embrace modern software tools for market surveillance and investigation. Despite a longstanding effort to implement stock watch systems, the stock exchanges have yet to make
these systems fully effective. Most of the investigations into alleged market irregularities also
fail to embrace the tools of information technology. There is a large pool of software talent in
the country that could develop modern neural network and artificial intelligence tools that
could leapfrog the best in the world. This has not happened.
There has been a tendency to imitate the US model of market surveillance without
recognising that within the US itself, there is considerable disquiet about the model. This was
true even before the Enron scandal. As Oesterle (2000) points out in an incisive analysis:
“Although the U.S. securities markets are the world’s largest and most liquid, it does not
follow that the regulatory system has been an unqualified success. Strong economic
fundamentals have created and sustained financial markets, not NYSE policing of its
floor traders. … A fairer assessment is that the SRO regime has proved to be barely
adequate at best. … During quiet periods, the SEC largely relies on SROs to police
trading floors, and it routinely approves SRO rules and disciplinary decisions. In other
words, the SEC during such periods tends to be lazy and complacent. When a scandal
breaks in a trading market, there is embarrassment and handwringing over why the
exchange involved was not more vigilant in disciplining its members. The exchange
contritely proposes minor rule modifications, often at the SEC’s insistence, leaving the
exchange’s functions and membership largely intact. The SEC approves the changes and,© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
20
with some fanfare, the regulators and the regulated hail the virtues of the SRO system—
until the next scandal. In recent years the SEC has not been able to resist the temptation
to tinker too much with the rules of the exchanges. But the illusion that the SEC is
guaranteeing the integrity of exchanges removes an incentive for the exchanges
themselves to exercise diligence, lest they lose their customers. And customers are lulled
into a false sense of security, believing the SEC is closely policing the day-to-day
activities of the exchanges.”
There is a need to rethink the entire dirigiste model of regulatory surveillance and rely more
on countervailing power in the market place. Abolition of short sale restrictions is one way of
bringing countervailing power to bear. Another important step is greater transparency and
disclosure. Using modern artificial intelligence methods it should be possible for the trading
system to automatically generate alerts about suspicious trading patterns and price/volume
trends. Rather than feed these alerts to a set of error-prone human surveillance officials (with
potentially perverse incentives), these alerts should be publicly disseminated. By doing so,
the information is placed in the hands of those who have every incentive to take corrective
actions. If an automated surveillance alert indicates possible bear manipulation, the bulls are
immediately forewarned to protect their own interests. These forewarned investors become a
countervailing power to the power of the would-be manipulators. Such an approach would
reduce the role of human discretion and replace this discretion by the impersonal logic of
computing systems and free markets. This approach would also reduce the agency costs
associated with the regulatory approach. I would argue that India with its abundant software
talent is uniquely positioned to lead the world in such a process of development.
5.5.4 The Problems of Unit Trust of India
The biggest problem however was in the case of the largest and oldest mutual fund, the Unit
Trust of India. The oldest of its schemes, US64, had over a period of time developed into a
queer animal. It was an open-end scheme, but did not link its repurchase and resale prices to
Net Asset Values (NAV). In fact, it did not report NAVs at all. For several years, repurchase
and resale prices had been held fairly steady while the fund paid out attractive annual
dividends. By the early 1990s, many institutional and retail investors had come to perceive
US64 as an attractive fixed income investment though the majority of its investments were
actually in equities. Because of its liquid secondary market, many even regarded it as a
money market instrument. This was fine as long as US64’s NAV was significantly above its
repurchase and resale value. This excess provided a safety cushion to absorb market
fluctuations.
2
The SEBI Annual Report 1999-2000, Table 2.39 provides details of these funds and their
schemes.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
17
In the mid-1990s, however, it became clear to careful observers that this safety cushion was
being eroded and that the scheme was exposed to a high degree of market risk. It was only in
1998 that UTI itself announced that it had a large deficit in US64; not only was the NAV
below the resale price, it was below even par value. A run on the fund appeared likely as
investors prepared to exit before the resale price was lowered to bring it in line with NAV. At
this stage, the government undertook a bail out in which it paid UTI Rs 33 billion (the book
value) for securities that had a market value of only Rs 15 billion. It was also decided to
make the scheme NAV based over three years.
In mid 2001, a sharp drop in the Indian market pushed US64 into a large deficit again, but the
government now indicated its unwillingness to bail out the institution. The fund then took the
drastic step of suspending repurchase and resale of units under the scheme. At the same time,
it opened a special liquidity package allowing any investor to redeem up to 3000 units at
fixed pre-announced rates starting at Rs 10 for August 2001 and going up to Rs 12 in May
2003. In January 2002, the scheme reopened for fresh subscription as an NAV based scheme
where both purchases and sales are at NAV linked prices. At the same time for old investors,
the government offered some relief. First, the facility of redemption at pre-announced rates
ranging from Rs 10 to Rs 12 was extended from 3000 units to 5000 units. Second and more
important, for holdings above 5000 units, UTI assured a repurchase price of Rs. 10 per unit,
or NAV, whichever is higher on May 31, 2003. This assurance was backed by the
Government which agreed that in the event of NAV in May 2003 being lower than the
guaranteed repurchase price, it would compensate UTI for the difference. Thus after six
months of vacillation, the UTI was bailed out by the taxpayer for the second time in four
years.
The distinguishing feature of the Unit Trust of India is that it is not government owned. The
government controls the organisation without owning it. The initial capital of UTI consisted
of Rs 50 million of subscription by government institutions to US64 in 1964. This initial
capital is not a separate share capital but is merely a part of US64 and even in early years, it
was only a small part of US64. Thus the government was just the first of the millions of
investors in US64. All the fixed assets
3
including the land and buildings of UTI have been
bought out of the funds of US64 and are shown as assets of US64. In this sense, the true
owners of UTI are the US64 unitholders and the government controls the organisation only
by virtue of the UTI Act and not by virtue of ownership.
The logical solution to the problems that UTI found itself in would therefore have been for
the government to withdraw from the scene by returning UTI to its rightful and legitimate
owners – the holders of US64. These owners would then have had the right to decide for
themselves how their funds should be managed. The simplest way to achieve this
demutualisation would have been for UTI to transfer all its buildings and other asset
management related assets from US64 to a new company and to spin this company off to the
US64 unit holders. The new company would have become the Asset Management Company
(AMC) for all UTI schemes. The UTI Act could then have been repealed and UTI could have
been brought under the SEBI Mutual Fund Regulations.
3
These fixed assets have a book value of Rs 8.5 billion (Malegam, 2001).© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
18
The US64 holders should have been allowed to do what they pleased with the shares that they
would have received in the newly created AMC. They could sell them to anybody they
choose or they could hold on to them. It was possible that a large domestic or foreign
financial institution would have launched a tender offer for these shares to take control of the
new AMC. They should be have been allowed to do so with no restrictions other than that
imposed by the SEBI Takeover Regulations.
As a rule of thumb, an AMC is valued at 2-3% of assets under management. This would
suggest that the new AMC would have been worth about Rs 10-15 billion. The large
distribution network, valuable real estate and other fixed assets would probably have added
several billion more to the valuation. Thus the shares in the AMC would have gone some way
to compensating the US64 holders for the losses that they have suffered under government
management. It would also have established the principle that the owners have the right to
replace any management that performs badly even if that management is the government
itself. Had this solution been adopted in mid 2001 (or even better immediately after the 1998
bailout), it would have avoided using taxpayer money to bail out the investors of US 64 in
2002/2003.
Trust of India. The oldest of its schemes, US64, had over a period of time developed into a
queer animal. It was an open-end scheme, but did not link its repurchase and resale prices to
Net Asset Values (NAV). In fact, it did not report NAVs at all. For several years, repurchase
and resale prices had been held fairly steady while the fund paid out attractive annual
dividends. By the early 1990s, many institutional and retail investors had come to perceive
US64 as an attractive fixed income investment though the majority of its investments were
actually in equities. Because of its liquid secondary market, many even regarded it as a
money market instrument. This was fine as long as US64’s NAV was significantly above its
repurchase and resale value. This excess provided a safety cushion to absorb market
fluctuations.
2
The SEBI Annual Report 1999-2000, Table 2.39 provides details of these funds and their
schemes.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
17
In the mid-1990s, however, it became clear to careful observers that this safety cushion was
being eroded and that the scheme was exposed to a high degree of market risk. It was only in
1998 that UTI itself announced that it had a large deficit in US64; not only was the NAV
below the resale price, it was below even par value. A run on the fund appeared likely as
investors prepared to exit before the resale price was lowered to bring it in line with NAV. At
this stage, the government undertook a bail out in which it paid UTI Rs 33 billion (the book
value) for securities that had a market value of only Rs 15 billion. It was also decided to
make the scheme NAV based over three years.
In mid 2001, a sharp drop in the Indian market pushed US64 into a large deficit again, but the
government now indicated its unwillingness to bail out the institution. The fund then took the
drastic step of suspending repurchase and resale of units under the scheme. At the same time,
it opened a special liquidity package allowing any investor to redeem up to 3000 units at
fixed pre-announced rates starting at Rs 10 for August 2001 and going up to Rs 12 in May
2003. In January 2002, the scheme reopened for fresh subscription as an NAV based scheme
where both purchases and sales are at NAV linked prices. At the same time for old investors,
the government offered some relief. First, the facility of redemption at pre-announced rates
ranging from Rs 10 to Rs 12 was extended from 3000 units to 5000 units. Second and more
important, for holdings above 5000 units, UTI assured a repurchase price of Rs. 10 per unit,
or NAV, whichever is higher on May 31, 2003. This assurance was backed by the
Government which agreed that in the event of NAV in May 2003 being lower than the
guaranteed repurchase price, it would compensate UTI for the difference. Thus after six
months of vacillation, the UTI was bailed out by the taxpayer for the second time in four
years.
The distinguishing feature of the Unit Trust of India is that it is not government owned. The
government controls the organisation without owning it. The initial capital of UTI consisted
of Rs 50 million of subscription by government institutions to US64 in 1964. This initial
capital is not a separate share capital but is merely a part of US64 and even in early years, it
was only a small part of US64. Thus the government was just the first of the millions of
investors in US64. All the fixed assets
3
including the land and buildings of UTI have been
bought out of the funds of US64 and are shown as assets of US64. In this sense, the true
owners of UTI are the US64 unitholders and the government controls the organisation only
by virtue of the UTI Act and not by virtue of ownership.
The logical solution to the problems that UTI found itself in would therefore have been for
the government to withdraw from the scene by returning UTI to its rightful and legitimate
owners – the holders of US64. These owners would then have had the right to decide for
themselves how their funds should be managed. The simplest way to achieve this
demutualisation would have been for UTI to transfer all its buildings and other asset
management related assets from US64 to a new company and to spin this company off to the
US64 unit holders. The new company would have become the Asset Management Company
(AMC) for all UTI schemes. The UTI Act could then have been repealed and UTI could have
been brought under the SEBI Mutual Fund Regulations.
3
These fixed assets have a book value of Rs 8.5 billion (Malegam, 2001).© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
18
The US64 holders should have been allowed to do what they pleased with the shares that they
would have received in the newly created AMC. They could sell them to anybody they
choose or they could hold on to them. It was possible that a large domestic or foreign
financial institution would have launched a tender offer for these shares to take control of the
new AMC. They should be have been allowed to do so with no restrictions other than that
imposed by the SEBI Takeover Regulations.
As a rule of thumb, an AMC is valued at 2-3% of assets under management. This would
suggest that the new AMC would have been worth about Rs 10-15 billion. The large
distribution network, valuable real estate and other fixed assets would probably have added
several billion more to the valuation. Thus the shares in the AMC would have gone some way
to compensating the US64 holders for the losses that they have suffered under government
management. It would also have established the principle that the owners have the right to
replace any management that performs badly even if that management is the government
itself. Had this solution been adopted in mid 2001 (or even better immediately after the 1998
bailout), it would have avoided using taxpayer money to bail out the investors of US 64 in
2002/2003.
5.5.3 Assured Return Schemes and Mutual Fund Solvency
A mutual fund is one of the institutions that, in theory, requires almost no risk capital (Merton
and Perold, 1993). However, in India many mutual funds, particularly in the public sector
operated schemes that guaranteed a minimum return. These were like bank deposits
sweetened with a call option on the stock market, but many mutual funds failed to recognise
the risks involved in these products. When the portfolios of these schemes did badly (partly
due to poor management and partly due to the lacklustre performance of the market itself),
the mutual funds had great difficulty in fulfilling their return guarantees. Under pressure from
SEBI, the public sector banks and insurance companies that had sponsored these mutual
funds provided financial support of nearly Rs 20 billion to the mutual funds to allow them to
honour the guarantees. Of these seven mutual funds, one needed a support of Rs 12 billion,
three needed about Rs 2 billion each, and three needed relatively small amounts
and Perold, 1993). However, in India many mutual funds, particularly in the public sector
operated schemes that guaranteed a minimum return. These were like bank deposits
sweetened with a call option on the stock market, but many mutual funds failed to recognise
the risks involved in these products. When the portfolios of these schemes did badly (partly
due to poor management and partly due to the lacklustre performance of the market itself),
the mutual funds had great difficulty in fulfilling their return guarantees. Under pressure from
SEBI, the public sector banks and insurance companies that had sponsored these mutual
funds provided financial support of nearly Rs 20 billion to the mutual funds to allow them to
honour the guarantees. Of these seven mutual funds, one needed a support of Rs 12 billion,
three needed about Rs 2 billion each, and three needed relatively small amounts
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