Search the Internet          Tips  Sites: Finance, Investment

UTI woes right medicine for India: Experts

Robin Elsham

News from India's biggest mutual fund company, state-run UTI, just seems to get worse, but many in the market believe the longer-term impact will be positive as bad practices are flushed out of the system.

The former chairman and two directors of Unit Trust of India were arrested last weekend, allegedly for losing Rs 328 million ($6.96 million) by investing in an Internet company against their own research department's advice.

That followed UTI's shock to the smaller saver on July 2, when it suspended redemptions from its flagship US-64 fund after a wave of withdrawals on the back of tanking stockmarkets, a move affecting 20 million investors. It has since eased that by permitting limited withdrawals.

Yet as the drama unfolds, fund managers and analysts say the effect on the Indian stock market and mutual industry will be temporary and is merely the latest episode in a year of financial scandals as India necessarily tightens regulations in one of the world's most free-wheeling markets.

"It may have a negative impact temporarily but it (UTI's problems) will get sorted out quickly," said A P Kurian, the chairman of the Association of Mutual Funds in India.

"Sentiment is likely to be impacted in the short-term," concurred Nikhil Khattau, chief executive officer of Sun F&C Asset Management Pvt Ltd.

"But this has to be good in the long term... India is cleaning itself up."

The process has been a gut-wrenching experience for investors. Over six-weeks from March 1, the Bombay Stock Exchange index plummeted almost 30 per cent, whipping out about $20 billion in shareholder value. That drop was triggered by a slew of insider trading scandals and an ensuing credit crisis.

Clearly, this has not been a market for widows, orphans and the faint of heart.

But many investment advisers continue to recommend investors are not distracted by the periodic tremors that shake the overall market, and concentrate instead on looking for resilient, well-managed Indian companies with growing profits and prospects.

FOREIGN INFLOWS

Throughout the convulsions of the past seven months, foreign investors have pumped money into Indian equities, a trend fund managers see continuing despite the UTI upheaval.

"It may not be of the same momentum, but it will be in the same direction," says Aspi Contractor, chief investment officer at Tata Asset Management, which oversees $180 million in funds.

Foreign institutional investment in Indian securities totals a net $2.51 billion in January-June, a record for any six-month period. Another $132.5 million has rolled in so far in July, including $152.4 million into equities.

Fund managers say the reaction to UTI's woes has been muted because its problems were no surprise to the professional market.

"The market will ignore these problems, which have been around for donkey's (many) years. It's not as though they just recently surfaced," said the European fund manager.

He added it was common knowledge UTI's "operation was not sustainable -- giving above market rates of return."

Khattau argued that the state-run company's practices stem from its contradictory dual role as both an investment and development finance fund.

UTI was established in the early 1960s to raise funds for industrial development. Originally it invested only in government bonds, but began chasing higher returns by investing in stocks after the government allowed other mutual funds to be set up from 1987 onwards.

One fund manager, who declined to be named, said financial experts suspect UTI, which manages 87 funds in all, managed to pay above market rates by "dipping into other profit-making schemes, shuffling assets among funds and cross subsidisation."

PROBLEM POSTPONED

The European fund manager said that by freezing redemptions, UTI had only postponed the problem of making US-64 into a fund where the redemption price was properly tied to its net asset value. "It's a cap on the upside, but it's not a panic sell," he said.

The reduced sense of panic is because the credit package organised for UTI, and the partial redemption option recently announced for small investors, had helped to calm financial markets.

On July 15, UTI announced it would allow all investors to redeem up to 3,000 units from August at a guaranteed minimum price. The price begins at Rs 10 per unit, and rises by 10 paise per month to a maximum of Rs 12 in May 2003.

Some Rs 30 billion in assistance is being readied, on the assumption that two out of three investors may want to use the exit option. Investors owning 3,000 units or less make up 47 per cent of US-64s capital, according to UTI.

A consortium of state-run banks has agreed to provide loans totalling Rs 15 billion to 20 billion to UTI. The Industrial Development Bank of India has also agreed to prematurely redeem Rs 15 billion of bonds held by the firm.

Analysts widely view the arrangements as sufficient to spare UTI the need to aggressively sell off its stock holdings to raise money needed to meet redemptions.

UTI's investments make up 11 per cent of the value of all stocks traded on the Bombay Stock Exchange.

ALSO READ:
The UTI Crisis