Naresh Nadeem

WHILE the six-month freeze announced by the Unit Trust of India (UTI) on all transactions in its Unit Scheme 1964 (US-64) has come as a bombshell to the millions of its small investors, it has left even the most vocal supporters of liberalisation dumbfounded. After the share market scandal induced by Harshad Mehta, Hiten Desai and their likes in the very first year of liberalisation, perhaps no other economic news has caused so many ripples in the country and invited so many comments from journals, newspapers and TV channels.

But what has been lost in the maze of abstract quantitative data is the agony the small US-64 investor is feeling today. One cannot hope to fathom the depth of this agony without understanding how much the scheme mattered to this small investor. To this end, let us begin with how the US-64 used to function in the past and what benefits it used to provide to its small investors.

As the very name of the scheme suggests, the US-64 functioned in terms of units which small investors used to purchase from the UTI and sell back to the latter whenever they needed hard cash. In every calendar year, the transactions used to start in July after the UTI declared the sale and repurchase prices of its units. Sale price meant the rate an investor paid to purchase units from the UTI, and repurchase price was the rate at which he could sell his units back to the UTI. These prices used to appreciate month by month, they were duly notified through newspaper ads, and the transactions used to be closed at May-end next year. The month of June was reserved for bookkeeping and calculation exercises within the UTI, after which it used to declare a rate of dividend for its investors.

To illustrate it concretely, let us take the example of the July 1994-June 1995 period --- the year just before the US-64 suffered its first major jolt at the hands of a leading corporate house of the country. In July 1994, as in previous years, the UTI offered to the investors US-64 units at a premium --- at Rs 15.30 per unit against the book value of Rs 10 per unit. As in previous years, again, the sale price of the units went on appreciating and had, for example, reached Rs 18.30 per unit in October 1994, only after three months. At the end of its transaction year, that is, towards the end of June 1995, the UTI announced a dividend of 26 per cent. Thus every unit of a book value of Rs 10 earned a profit of Rs 2.60, which meant that if a person had bought a unit at the actual price of Rs 15.30 in July 1994, he earned an interest of around 17 per cent after a year. The highest bank interest rate at that time was 13.5 per cent per annum.

After the end of June every year, the investor had two options before him. He could either get a cheque for the dividend accrued to him in the previous 12 months or he could reinvest the same, that is, get it converted into units and thus increase the number of units in his hand. In the latter case, the amount of dividend due to him automatically increased year after year, till he chose to withdraw money by selling his units back to the UTI.

Compared to other instruments of investment, the US-64 offered several benefits to investors. First, as is evident from the above example, small investors found investing in US-64 units far more lucrative in terms of interest amount than putting their money in a bank.

Secondly, compared to some other instruments like Kisan Vikas Patras or National Saving Certificates, the US-64 offered its investors the benefit of a very high degree of liquidity. While one’s money was locked in the above instruments for five to six years, a US-64 unit holder could sell his units back to the UTI any time in the year, save in the month of June, at the previously declared repurchase price. In any month, the repurchase price used to be only 15 to 25 paise less than the sale price, and did not mean any loss to the investor. After surrendering his units to the UTI, the investor got a cheque for his money in a week or so.

Thirdly, the US-64 was considered to be totally free from the risks of volatility that are associated with speculative investments. For about three decades since its inception, that is, as long as the US-64 money was not invested in stock market shares, the investor’s money was perfectly safe from the ups and downs (mostly downs) of the stock market. The investor had full faith in the US-64 units and thought that his money was safe in the custody of the "government of India."

Fourthly, contrary to the monthly deposit schemes run by the post office, some banks and even private organisations like the Peerless or Sahara, the US-64 investors faced no risk of forfeiting any part of their principal or dividend or both, in case of default in payment for a couple of months. This was particularly to the liking of those who had no regular or fixed income.

Fifthly, under the US-64, an investor was required to purchase a minimum of only 100 units; that meant an investment of only Rs 1500 or so. Thus, even those with modest incomes and savings could become members of the scheme.

Lastly, if a US-64 investor had two options before him, of getting a cheque for the dividend earned by him or of reinvesting the same into more units, the conversion from one option to the other was not difficult in the least and could be effected through simple correspondence. This offered another attraction for the investors.

It was these factors that made the US-64 investments highly attractive for the investor community as a whole. The scheme, on the whole, was a haven for small investors, particularly those working in the private or unorganised sector, who did not have any security of post-retirement or post-retrenchment benefits. Factory workers, peasants of all hues, artisans, middle class employees, pensioners, hawkers, small shopkeepers and vendors, headload workers and even rickshaw-pullers --- all used to confide in the US-64 units, taking this form of investment as their best security in bad days. This is what explains the tremendous success of the scheme and the very high number of investors it attracted --- more than 20 million. This also explains how the US-64 alone accounted for about 23 per cent of the Rs 60,000 crore plus corpus of the UTI that runs a number of other schemes. In fact, no scheme of the UTI achieved such tremendous success as the US-64 did, making the UTI the biggest mutual fund of the country and one of the biggest in the world.

But, then, it was the new economic policy of 1991 that hindered the so far smooth functioning of the US-64 and of the UTI as a whole. If the US-64 was hitherto a debt-oriented instrument, its fund managers now chose to make it equity-oriented. Deviating from its earlier path of investing in the fixed-income securities, these fund managers now turned into stock market players with a huge corpus of others’ money in their hands. Capitalising on the stock market boom of 1992 was their ostensible plea.

In this atmosphere of liberalisation, the US-64 suffered its first major jolt in 1995 when the UTI invested US-64 money in Reliance group’s shares and the group offered it fake share certificates. However, when the media got scent of this bungling and some adverse comments came, the Reliance group offered to take back the fake share certificates and issue new ones in their stead. But the US-64 heavily lost in this process which involved a revaluation of the shares the UTI held. At that time, the involvement of UTI fund managers and its then chairman in the bungling was widely suspected. By that time, the Reliance group had also earned notoriety for some of its arbitrary actions. Those who had once purchased Reliance Petro shares were, for instance, later made shareholders in other companies of the group, without their consent. Nor did the Reliance Petro issue carry any clause informing the subscribers that such a conversion could be effected.

However, the UTI persisted in its new-found love for stock market investments. Even though another major mutual fund, namely the SBI Mutual Fund, had already gone under because of the stock market volatility, never to regain its earlier importance, the US-64 fund managers chose not to learn any lessons from it. As a commentator (Mantoo Banerjee, Unit Distrust, The Statesman, July 6) says, with an excessively huge corpus at its disposal, the UTI now acquired the power to make or break companies, and this is what made its fund managers "maverick and manipulable."

This was indeed the point from where the downfall of the US-64 started, and the scheme never recovered its earlier coveted status. Because of the volatility of the stock market, and after the dreamy phase of the 1992 boom was over, the net asset value (NAV) of the US-64 units constantly went downhill, finally turning negative in 1998. At that time, it was only because of a modest intervention by the government, that directed its public sector enterprises to invest in the US-64, that a semblance (and only semblance) of the US-64’s recovery was created.

In this period, as the sale and repurchase prices of US-64 units were pegged to their NAV, these prices too registered a steady decline. Earlier, while the sale price of a unit used to start from Rs 15.30 in July and go up to above Rs 22 by May next, it now began to start from Rs 13.40 or so and never went beyond Rs 15.40. This was particularly depressing for small investors. For, a greater appreciation of the sale price meant a greater appreciation of the repurchase price at which the investors could sell their units back to the UTI mid-year, or a bigger dividend at the end of the year. As a result, in the last two years, the actual income from the US-64 units has even gone below what one could get from a bank deposit.

It was in this situation that the UTI dropped a bombshell on its investors by announcing a freeze on all US-64 transactions for the next six months.

This is something of the gravest nature as it has badly shaken the investors’ confidence in the UTI and, more particularly in US-64 --- virtually beyond redemption. The investor confidence in US-64 was not shaken even when the SBI Mutual Fund went under. The investor did not desert the US-64 even when the Canara Bank started a unit scheme of its own and offered its units at par value --- Rs 10 units for Rs 10 only. But the same cannot be said after the latest misdemeanour committed by the UTI fund managers.

The nefarious link of these fund managers with the corporate houses is clear from the fact of inside information these houses had about the impending downfall of US-64. It was widely reported that in April and May this year, these houses withdrew their money, about Rs 4,000 crore, from the US-64. It was only the small investors who were kept in the dark and eventually left in the lurch. The units these corporate houses held, were mainly those purchased before 1995, before the UTI launched another similar scheme (US-95) specifically for corporates. Contrary to US-64, the fate of US-95 seems to be safe, at least up till now.

Newspaper reports also go to show how the UTI invested heavily in the patently loss-making companies including the Pritish Nandy Communications, Business India, Pioneer and Himachal Futuristics. The BJP, the main ruling party at the centre, cannot escape its responsibility, as it was under the instructions from BJP ministers that the UTI made these shabby investments in these companies that are controlled by pro-BJP people.

As for the government, its reaction has been deplorable, to say the least. Finance minister Yashwant Sinha is on record saying that he was not going to lose his sleep because of the US-64 scam. He can of course afford not to lose his sleep, especially because millions of small investors have already lost their sleep on his behalf --- after losing their life-time savings, their only cushion for the bad days.

In the initial days of the scam, the government did virtually nothing except doling out empty assurances to the investors that everything will be okay in due course. Moreover, to date, there seems to be no concrete evidence of a government intervention to redeem the life of these hapless investors.

Equally deplorable is the ‘clarification’ given by Sinha that he was kept in dark over the US-64 issue. The fact is that the day-to-day functioning of the banks and non-banking financial institutions is regularly monitored by a joint secretary in the finance ministry, and there is no reason to believe that Sinha was unaware of what was happening in the UTI. Further, even if one takes a lenient view, grants Sinha the benefit of doubt and takes his ‘clarification’ at its face value, should not he own moral responsibility for what had been happening under his very nose, and resign forthwith?

Another moot question is: Why were the Deepak Parekh committee recommendations about the UTI not implemented? Certainly, Sinha cannot take the plea was nobody had sounded him in advance.

And now the latest news (July 8) is that the NAV of these units may go down to Rs 8.40 as against the book value of Rs 10 per unit.

On July 7, the UTI announced a repurchase price of Rs 10 per unit in a bid to console the investors and offset the criticism. Thus, again, a cruel joke is being played on small US-64 investors. The least they had paid for these units in July 2000 was Rs 13.40 per unit, not to talk of those who had purchased units mid-year. This means that these small investors will lose at least Rs 3.40 for each unit. Thus a person holding, say, 1,000 units will stand to lose Rs 3,400 on this count.

This bodes ill for the country’s economy as a whole as it is likely to push down our savings rate (which is already very low) and consequently the rate of capital formation. During the last ten years of liberalisation, bank interest rates have already gone down substantially, thanks to the non-interventionist government’s intervention against small savers. At the same time, thanks to the same non-interventionist government’s intervention again, the maturity period of the National Savings Certificates has already gone up from 5 to 6, to 6 and a half years, thus leading to a sharp fall in the rate of dividend accruing from these and similar instruments. These and similar developments are obviously forcing the small investors to take recourse to highly uncertain stock market gambling, and this precisely seems to be the government’s intention.

But this is what is bound to jeopardise the future of India’s economy sooner rather than later. The fact is that when the net savings rate in the state sector has been negative for many many years, and when the rate of saving in the corporate sector is virtually stagnant, it was the household sector, comprising mainly the small investors, that maintained the country’s gross savings rate at a steady 22-23 per cent and even took it up to 26 per cent at one point of time. That the savings rate has again declined in the era of liberalisation is obviously no concern of the government or of the proponents of liberalisation.

But others will certainly have to ask: What will happen to the country and its economy if the household sector’s savings rate goes down? The misdemeanour committed by the UTI under the benign patronage of the government has opened precisely this possibility.

And now watch out for what is going to happen to the UTI’s other schemes (for instance, the Unit Linked Insurance Plan or ULIP) in which small investors have put their money!