India's UTI lets investors sell fund

Many retirees put their life savings in US-64, thinking the state-backed mutual fund was a sure thing

By CNN's Alex Frew McMillan in Hong Kong

MUMBAI, India -- India's largest mutual-fund company will let small investors sell out of its biggest fund from August 1.

The board of state-run Unit Trust of India (UTI) met Sunday. It voted to let shareholders of its flagship Unit Scheme 64 fund sell up to 3,000 units at a price starting at 21 cents (10 rupees).

UTI also appointed a new chairman. M. Damodaran. Damodaran, a government official who looked after weak banks at the Reserve Bank of India, took over the post for a year, effective Sunday.

UTI, India's largest investor, sparked panic among small shareholders when it froze its flagship US-64 fund on July 2 for up to six months.

Former chairman P.S. Subramayan resigned in the scandal, saying the fund may have negative reserves.

India's finance minister, Yashwant Sinha, questioned the US-64 freeze and said stakeholders should be allowed to sell out.

A large number of Indian retirees put their life savings in US-64, which has 20 million unit holders.

A UTI spokesman, B.G. Daga, said that letting investors sell up to 3,000 units frees up around half the money in the fund for sale.

The arrangement covers 5 million to 7 million shareholders, he said, meaning most small shareholders can sell out.

A sliding scale

UTI manages $12.7 billion (600 billion rupees), two-thirds of the mutual-fund money in India. US-64 is by far its biggest and most-popular offering, making up a quarter of its assets.

Investors are free to sell up to 3,000 units through May 2003. They can sell either at the Net Asset Value of the units or at a price based on a monthly sliding scale.

The scale starts at 10 rupees in August. That's almost one-third below the May redemption price of 14.25 rupees per unit.

To try to stem a likely flood of redemptions, the price rises one-tenth of a rupee per month, to 12 rupees per unit in May 2003.

UTI said the government would back any shortfall between the sale price and the NAV.

The government bailed out UTI in March 1999 and is considering stepping in again.

In appointing Damodaran as chairman, the central government sidestepped K.G. Vassal, a UTI executive who had been acting as chairman, in favor of its own representative.

UTI's critics say it is badly run and has long bought and sold units at prices that have nothing to do with the underlying value of the fund.

Many small investors thought their investment in the government-backed fund was a sure thing.