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Chronology of the UTI crisis

The Unit Trust of India announced on Sunday a plan to allow small investors to begin redeeming units in its biggest fund.

The move partially reverses the state-run mutual fund management company's announced on July 2 to suspend for the remainder of the year the repurchase and sale of units in its US-64 fund, which accounts for a fifth of its Rs 575 billion ($12.2 billion) in assets.

UTI's decision to freeze redemptions rattled financial markets, dismayed the 20 million investors who own units in US-64 and cast a cloud over the outlook for the Indian stock market and mutual fund industry.

The government and Union Finance Minister Yashwant Sinha have come under blistering media and opposition attack over the crisis engulfing the fund. The issue is expected to dominate the monsoon session of parliament starting later this month.

The following is a chronology of events, charting how the crisis unfolded:

June 2001: A rash of stories appear in financial newspapers noting a sharp rise in redemptions from US-64. Many reports speculate that UTI will announce in July that it has cut the annual dividend. Reports also note unit holders are looking at a potentially even larger decline on their US-64 investment when UTI begins linking the redemption price to the fund's net asset value (NAV). Due to the share market's sharp decline in the six months to June, the fund's NAV is estimated to have fallen below Rs 10 per unit, about a third less than the redemption price of Rs 14.25 paid in May. UTI expected to begin linking the redemption price to the fund's NAV by next February.

July 1: A leading financial daily reports that UTI's 16 MIP funds are trading below par. Other stories claim the NAV of US-64 eroded by investments in stocks championed by Ketan Parekh, a Bombay-based stockbroker known as the "Big Bull" for his alleged ability to move the market. Parekh was arrested in March for fraud. Parekh has denied any wrongdoing.

July 2: UTI suspends repurchase and sale of US-64 units for six months. Also announces annual dividend for past year to June cut to 10 per cent, from 13.75 per cent the previous year. UTI chairman P S Subramanyam warns that the reserves of US-64 might be "negative". Subramanyam declares UTI's intention to begin linking the redemption price to the NAV by June 2002.

July 3: The Bombay Stock Exchange's Sensex closes down 3.3 per cent. Sinha says that the finance ministry is scrutinising the decision to suspend redemptions, and will take action if necessary to safeguard the interests of small investors.

July 4: Under finance ministry pressure, Subramanyam quits as UTI chairman. K G Vassal, UTI's senior most executive director, appointed acting head. Review panel set up and told to prepare a report within 15 days. The finance ministry says UTI Act to be amended to bring US-64 under the surveillance of the Securities and Exchange Board of India.

July 5: Four banks, including three government-run lenders, announce they will loan money to UTI at below-market rates. UTI also sells a large portion of its bond portfolio to UTI Bank, its banking subsidiary. Both bits of news help quell greatest immediate concern of financial markets: that UTI, to raise cash needed to meet redemptions in other funds, may be forced to sell large chunks of its stock and bond holdings in the market, causing prices to crash.

July 6: Finance Minister tells parliamentarians an investigation will be launched into allegations of insider trading in US-64 units ahead of the July 2 suspension announcement. There was a sharp rise in redemptions in the April-June quarter by Indian corporations, prompting allegations companies were tipped off ahead of time.

July 15: UTI board announces all US-64 investors will be allowed to redeem up to 3,000 units at any time between August 1 and May 2003 under a price formula designed to "pave the way for migration of the scheme from administered pricing to NAV-based pricing." Government also announces the appointment of M. Damodaran, a senior Finance Ministry bureaucrat, to head UTI.

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