Indian stocks down as fund allows selling

Investors worry UTI could flood India as it sells stock to meet redemptions on U.S.-64

By CNN's Alex Frew McMillan and wire reports

MUMBAI, India -- Indian stocks closed with losses Wednesday, as its biggest mutual fund let investors sell out for the first time in a month.

But a spokesman for the Unit Trust of India (UTI), the country's biggest investor, claimed initial redemptions of its flagship Unit Scheme 64 fund were light.

UTI shocked investors when it closed U.S.-64 on July 2, saying the mutual fund might have negative reserves.

Facing pressure from the Indian government, UTI on Wednesday started letting investors sell up to 3,000 units of the fund, through 2003, starting August 1.

The idea is to let small investors sell out if they want. The flood of demand to trade in shares is expected to amount to a "run on the bank."

Local reports have suggested investors will look to cash in as much as $1.3 billion (60 billion rupees) over the next two to three months.

Ready to meet demand

Investors worry the expected rash of redemptions could flood India with shares. They fear UTI will have to sell stock to match the amount of money it has to pay back.

The benchmark Bombay Stock Exchange index ended down 1.4 percent at 3,284.17 on Wednesday. Most Asian markets posted strong gains for the day.

Reliance Industries lost 1.6 percent, to 314.70 rupees, despite posting a surprise 14 percent net-profit increase on Tuesday.

Petrochemical maker Reliance is the market's largest stock and U.S.-64's biggest holding.

A UTI spokesman told CNN that Wednesday's fall wasn't connected to the fund manager. He said many of the 50 branches open for U.S.-64 sales had less than 100 applicants.

"Today's market fall has nothing to do with our redemptions," the spokesman, B.G. Daga, said. "We have announced that we are not going to sell into a falling market."

But India's scandal-plagued market is nervously watching what happens.

Reserves to meet the selling

UTI says it is ready to meet the demand from sellers. It has tied up lines of credit with banks, as well as prepping its own reserves.

"We have tied up funds to face the worst case scenario, but we are sure such an occasion will not arise," M. Damodaran, UTI's new chairman, told reporters.

Damodaran, whom the central government sent in from the Reserve Bank of India, where he oversaw weak banks, goes by an initial for his first name, like many Indians.

UTI originally said investors might not be able to sell until the end of the year. The prospect of a collapse of U.S. 64 panicked its 20 million investors.

Many retirees had put their life savings into the fund, thinking investments with state-backed UTI were a sure thing.

The resulting scandal claimed the job of UTI's chairman, P.S. Subramayan. It has also placed a strain on the administration of Prime Minister Atal Behari Vajpayee.

Vajpayee offered to step down amid the fallout but saw his resignation turned down.

A fixed price

UTI will now redeem units at fixed, guaranteed prices starting at 10 rupees per unit. But that is one-third the redemption price in May.

To encourage investors to stay with the fund, the sale price rises 10 paise per month, until it reaches 12 rupees in May 2003.

"Only those who are in urgent need of funds should redeem now," Damodaran said. Investors will do better with that growth than they would with bank savings or other vehicles, he said.

UTI has lined up backing from a consortium of 19 lenders, led by the State Bank of India.

"The line of credit that we have from banks far exceeds our requirements," Damodaran said. But he did not specify the amount.

Investors worry UTI may be forced to sell off a large pool of stock to meet a new wave of redemptions, flooding India's markets with shares.

Reliance Industries Ltd. was the fund's top stock holding as of the end of June. It accounted for 16 percent of U.S.-64.

The next-biggest stock holdings were Reliance Petroleum Ltd., ITC Ltd., Infosys Technologies Ltd., Hindustan Lever Ltd. and HDFC Ltd. They were the only companies to make up more than 2 percent of the fund.

UTI shut U.S. 64, which accounts for a quarter of all its assets, because it saw huge redemptions in April and May. UTI manages around $12.2 billion (575 billion rupees), two-thirds of all the mutual-fund money in India.

Its critics say it has been badly managed and has long bought and sold units in its funds at values that have nothing to do with the value of the underlying stock they hold.

What to do with UTI is still undecided. It has been losing its stranglehold on India's mutual-fund market and there is growing pressure for it to be privatized or split up.

Reuters contributed to this report.