WHILE the six-month freeze announced by the Unit Trust of India (UTI) on all tra

nsactions in its Unit Scheme 1964 (US-64) has come as a bombshell to the million
s of its small investors, it has left even the most vocal supporters of liberali
sation dumbfounded. After the share market scandal induced by Harshad Mehta, Hit
en Desai and their likes in the very first year of liberalisation, perhaps no ot
her 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 th
e 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 inve
stor. 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.
THE SCHEME’S FUNCTIONING
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 unit
s. Sale price meant the rate an investor paid to purchase units from the UTI, an
d 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 throug
h newspaper ads, and the transactions used to be closed at May-end next year. Th
e month of June was reserved for bookkeeping and calculation exercises within th
e 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 h
ands of a leading corporate house of the country. In July 1994, as in previous y
ears, 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 R
s 18.30 per unit in October 1994, only after three months. At the end of its tra
nsaction year, that is, towards the end of June 1995, the UTI announced a divide
nd of 26 per cent. Thus every unit of a book value of Rs 10 earned a profit of R
s 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. T
he 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 co
uld either get a cheque for the dividend accrued to him in the previous 12 month
s or he could reinvest the same, that is, get it converted into units and thus i
ncrease the number of units in his hand. In the latter case, the amount of divid
end due to him automatically increased year after year, till he chose to withdra
w money by selling his units back to the UTI.
BENEFITS TO INVESTORS
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 pu
tting 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 repurcha
se 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 surrender
ing his units to the UTI, the investor got a cheque for his money in a week or s
o.
Thirdly, the US-64 was considered to be totally free from the risks of volatilit
y that are associated with speculative investments. For about three decades sinc
e its inception, that is, as long as the US-64 money was not invested in stock m
arket shares, the investor’s money was perfectly safe from the ups and downs (mo
stly 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 b
anks and even private organisations like the Peerless or Sahara, the US-64 inves
tors 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 wit
h 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 conve
rsion from one option to the other was not difficult in the least and could be e
ffected through simple correspondence. This offered another attraction for the i
nvestors.
It was these factors that made the US-64 investments highly attractive for the i
nvestor community as a whole. The scheme, on the whole, was a haven for small in
vestors, particularly those working in the private or unorganised sector, who di
d not have any security of post-retirement or post-retrenchment benefits. Factor
y workers, peasants of all hues, artisans, middle class employees, pensioners, h
awkers, small shopkeepers and vendors, headload workers and even rickshaw-puller
s --- 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 scheme
s. In fact, no scheme of the UTI achieved such tremendous success as the US-64 d
id, making the UTI the biggest mutual fund of the country and one of the biggest
in the world.
POINT OF DOWNFALL
But, then, it was the new economic policy of 1991 that hindered the so far smoot
h 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-orient
ed. 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 b
ungling 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 hea
vily lost in this process which involved a revaluation of the shares the UTI hel
d. At that time, the involvement of UTI fund managers and its then chairman in t
he bungling was widely suspected. By that time, the Reliance group had also earn
ed notoriety for some of its arbitrary actions. Those who had once purchased Rel
iance Petro shares were, for instance, later made shareholders in other companie
s of the group, without their consent. Nor did the Reliance Petro issue carry an
y clause informing the subscribers that such a conversion could be effected.
However, the UTI persisted in its new-found love for stock market investments. E
ven though another major mutual fund, namely the SBI Mutual Fund, had already go
ne under because of the stock market volatility, never to regain its earlier imp
ortance, the US-64 fund managers chose not to learn any lessons from it. As a co
mmentator (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 manipu
lable."
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 n
egative in 1998. At that time, it was only because of a modest intervention by t
he government, that directed its public sector enterprises to invest in the US-6
4, 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 apprec
iation 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 bigge
r dividend at the end of the year. As a result, in the last two years, the actua
l income from the US-64 units has even gone below what one could get from a bank
deposit.
GRAVEST MISDEMEANOUR
It was in this situation that the UTI dropped a bombshell on its investors by an
nouncing 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’ co
nfidence in the UTI and, more particularly in US-64 --- virtually beyond redempt
ion. The investor confidence in US-64 was not shaken even when the SBI Mutual Fu
nd went under. The investor did not desert the US-64 even when the Canara Bank s
tarted a unit scheme of its own and offered its units at par value --- Rs 10 uni
ts for Rs 10 only. But the same cannot be said after the latest misdemeanour com
mitted by the UTI fund managers.
The nefarious link of these fund managers with the corporate houses is clear fro
m the fact of inside information these houses had about the impending downfall o
f US-64. It was widely reported that in April and May this year, these houses wi
thdrew 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. Contra
ry 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 l
oss-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 min
isters that the UTI made these shabby investments in these companies that are co
ntrolled by pro-BJP people.
DEPLORABLE REACTION
As for the government, its reaction has been deplorable, to say the least. Finan
ce 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 dol
ing out empty assurances to the investors that everything will be okay in due co
urse. 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 dar
k 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 secret
ary in the finance ministry, and there is no reason to believe that Sinha was un
aware of what was happening in the UTI. Further, even if one takes a lenient vie
w, grants Sinha the benefit of doubt and takes his ‘clarification’ at its face v
alue, should not he own moral responsibility for what had been happening under h
is very nose, and resign forthwith?
Another moot question is: Why were the Deepak Parekh committee recommendations a
bout the UTI not implemented? Certainly, Sinha cannot take the plea was nobody h
ad sounded him in advance.
And now the latest news (July 8) is that the NAV of these units may go down to R
s 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 co
nsole 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 Jul
y 2000 was Rs 13.40 per unit, not to talk of those who had purchased units mid-y
ear. This means that these small investors will lose at least Rs 3.40 for each u
nit. Thus a person holding, say, 1,000 units will stand to lose Rs 3,400 on this
count.
DARK DAYS AHEAD FOR ECONOMY
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 capit
al formation. During the last ten years of liberalisation, bank interest rates h
ave already gone down substantially, thanks to the non-interventionist governmen
t’s intervention against small savers. At the same time, thanks to the same non-
interventionist government’s intervention again, the maturity period of the Nati
onal 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 s
imilar instruments. These and similar developments are obviously forcing the sma
ll investors to take recourse to highly uncertain stock market gambling, and thi
s precisely seems to be the government’s intention.
But this is what is bound to jeopardise the future of India’s economy sooner rat
her than later. The fact is that when the net savings rate in the state sector h
as been negative for many many years, and when the rate of saving in the corpora
te sector is virtually stagnant, it was the household sector, comprising mainly
the small investors, that maintained the country’s gross savings rate at a stead
y 22-23 per cent and even took it up to 26 per cent at one point of time. That t
he 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 e
conomy if the household sector’s savings rate goes down? The misdemeanour commit
ted 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 in
stance, the Unit Linked Insurance Plan or ULIP) in which small investors have pu
t their money!