US-64: Most don't like it, but some do

Rasheeda Bhagat

FROM a JPC investigation to a judicial probe; from suggestions that the former UTI chief's property and savings be seized and put into the locked US-64 scheme, to the need for the Government to come to the rescue of small investors by allowing an exit route into other government securities.

Suggestions and outrage on the US-64 fiasco continue to pour in.

To feel the pulse of the small investor, with the UTI suspending sale and re-purchase of US-64 units for six months, Business Line spoke to some of the investors who were featured in this column in the last couple of months.

Mr. Anis Kalangi, a Chennai-based executive and a successful investor, says he does not hold a single unit of US-64. ``In fact, I have made it my investment policy never ever to invest in mutual funds,'' he says.

For he firmly believes that ``because it is our money, the mutual fundwallahs will not care for it and invest it whichever way they want without bothering to do proper home work or research.''

Mr Kalangi is confident there is nexus between the big corporates and mutual fund operators and gives the example of then UTI buying Reliance shares ``at around Rs 400 a few years ago when the market price was much less. I remember the UTI had picked up a few lakh shares. When such things, over which we as small investors have no control, can happen, how can we trust any mutual fund? I feel that since our money comes only with a lot of hard work, we have to be very careful while investing it. We should not place it under the care of anybody else, who gets a fancy salary, drawn from our money, for running a mutual fund.''

Mr Kalangi adds that he has learnt this lesson after being tempted to buy 500 shares of Morgan Stanley through the IPO a few years ago. ``When the price fell to Rs 8, I quickly got out, thanking my lucky stars that I lost only Rs 2000 in the whole venture.''

In contrast, Ms Smita Iyer, the Chennai-based General Manager of explocity.com has invested in US-64, buying it first 14 years ago at Rs 11 per unit. ``Like all small investors, we too thought it was a safe investment. Of course, right now the liquidity aspect of it is gone, but the safety aspect remains.'' She concedes that the small investor's trust is shattered vis-a-visthis scheme. ``There may be thousands of small investors who might not have even thought of selling it, but when a curb is put on you, that you can't sell it, obviously you are bound to get worried,'' she says.

As a person with a financial background and having been a research analyst, she differentiates herself from an average investor in this scheme who might not understand the nuances of the capital market. ``I can understand that when the markets are down, the value of a mutual fund has to go down. But the majority of people who have put their money into US-64 cannot understand this. To them this is a kind of government bond, and they feel that by reducing the dividend or not allowing them to liquidate their holding in this investment, the UTI has cheated them.''

But Ms Smita Iyer also points out that investors would do well to bear in mind that for 30 years US-64 had paid uninterrupted dividend. ``I got from this scheme as dividend 26, 20 and last year 13.75 per cent. Okay, now the dividend has been reduced to 10 per cent but let us honestly ask ourselves which company can give you returns like this.''

But Mr. Iqbal Raja, an iron and steel merchant from Mumbai, who has a ``substantial chunk of US-64 units'', is not in a mood to condone the UTI for what it has done. Having started investing in this scheme right from 1964, he is bitter that he did not heed the market gossip but ``purchased a further 15,000 units just a few months ago. I should have sold, instead of buying more, but somewhere inside my heart I had always felt that you can trust this scheme,'' he rues.

``I had such faith in this scheme that I used to tell all my friends that this was the best possible investment anyone, who did not know enough about the stock market to invest directly, could make. But my trust is shattered now. I would not rule out a possibility and a time when the PPF will tell you that you cannot withdraw your money from the scheme. The IFCI is already in the dumps and very shortly the IDBI may also go bust. How can you have any faith in any organisation of the Government of India after this?,'' he asks.

Reeling off figures of major corporates exiting from US-64, Mr Raja says that the companies which had ``inside knowledge got away, leaving the poor, hapless small investor to hold this sick baby. But, then, why should the government worry about the small investor? Is it there to protect his interest or that of the corporates? The answer is corporates, of course, because only they can grease its palm and not the poor investor.''

One investor from Mumbai, Mr P. Goutham Babu, is harsh in his indictment of the UTI. Comparing its decision to the Harshad Mehta and Ketan Parekh scams, he says: ``This is a clear breach of trust and an offence under Indian law. So the UTI top brass should be booked under the law and incarcerated in jail.'' He feels the real objective of the UTI was to service the small investor, especially in rural areas. ``Down the line this objective was devoured by the hungry sharks within the UTI who are perhaps influenced by big money bags. When the Vijayawada UTI office was opened many years ago, we were told the objective was to tap small and rural savings.

``Over the years the small investors, especially retired people, were made to believe that the UTI was a sort of an organisation which would give them shelter that would take care of their needs in the twilight of their lives. Many thus put their little savings of blood and sweat in the UTI schemes. Their faith is now betrayed. People like my father, who cannot earn anything at this stage of life, are left high and dry,'' he says angrily.

Mr Goutham Babu suggests that now that the UTI has made a mess and lost the confidence of investors, it should have the decency to at least allow some exit route to the small investors. ``The UTI should allow them to exit, up to a certain value, say Rs 50,000 to Rs 1 lakh, to other government schemes such as post-office savings or the PPF at original principal value.''

Extremely agitated that a UTI chief, who this investor believes, is responsible for the present plight of investors, should quit at this point in time, ``with all his perks in tact,''Mr Goutham Babu goes as far as to suggest that the former UTI chief's ``property, savings and terminal benefits should be seized and locked in this scheme so that he can have a feel of the pinch of what the unfortunate people are undergoing as a result of his dereliction and callousness!''

He finds hardly any comfort in the utterances of the Finance Minister, Mr Yashwant Sinha, that the government would ensure that the interest of the small-investors is not hurt. In fact, he finds fault with Mr Sinha for urging the small investor not to panic.

But against the millions of investors who feel trapped and cheated by the UTI's decision, there are the lucky few who got away. A Chennai-based chartered accountant, Mr M. R. Srinivasan, is one of them. Having accumulated almost 10,000 US-64 units over the years -- his average purchase price was around Rs 12 a unit -- he decided to liquidate his entire holding in 1998 at an average price of Rs. 14 a unit.

He decided to get out of the scheme because he was uncomfortable on many aspects of this scheme, not the least of which was the lack of transparency in the UTI's way of doing business. ``I decided to get out in 1998 when the market was agog with rumours about the large illiquid PSU stocks that UTI was warehousing on behalf of the Government of India. These stocks were purchased during the early 90s at high prices and had little relation to the returns they gave the investor,'' he says.

The ``stock meltdown -- courtesy the 1992 and 1994 stock scams'' -- reduced the UTI's ability to dispose its holdings at reasonable prices and book profits. On the contrary, it had to book losses on these purchases.

Mr Srinivasan also felt that the signing of the WTO and the continuous reduction of peak Customs duty was bound to take a toll on corporate profits and reduce returns on investments in the equity market.

Another thing which troubled him greatly was the lack of transparency in the UTI's functioning. ``It did not publish its accounts in any newspaper, leading one to speculate on the state of affairs at the UTI. Also, the media, at one point of time, indicated that the UTI had shares of various companies in its name but the scrips were not to be seen at the time of audit. And, the UTI was not in a position to prove them wrong readily.''

The chartered accountant also feels that the returns from his investment in this scheme were ``continuously coming down. The very fact that it had given only one bonus issue in its 35 year existence till 1998, spoke poorly of management strategy. The very same UTI had given good bonus shares for its other star fund (UTI Mastershare) within 10 years of its existence.''

All these factors added to his belief that the US-64 was not managed as it should have been. ``I also found that the new crop of mutual funds which were coming up were fleet-footed and market savvy when operating in the stock market. This helped them eat into UTI's market share and establish a good name for themselves apart from generating handsome returns for the investor. I held on to UTI for a long time because of the tax sops given, apart from non-availability of sound alternative investment opportunities. The losses contributed by PSU stocks were too much for one to accept and I felt that it will take the UTI a long time to recoup them. Hence, I sold all the units I had in UTI in 1998.''

However, Mr. Naresh Joshi, another chartered account in Mumbai, who works for the Parsi Dairy and has been a successful investor in the equity market, was surprisingly unruffled by the whole imbroglio. ``Yes, I have invested in US-64. I did hear rumours a couple of months ago, that this scheme will run into trouble as its NAV has been coming down consistently. But I didn't feel like selling, because I have immense trust in this scheme.''

So does he feel cheated or betrayed now?

``Not at all. This scheme has given me good returns in the last so many years. I have even got dividend over 20 per cent. Okay, this is a setback but I regard it as a temporary one. After all the scheme is not going to run away. I do not need to liquidate my holding now, so why should I worry. I will review the situation after two or three months,'' adds this rare cool customer of US-64.

Mr R. Srinivasan, who has been investing in the stock market since 1976, is another rare investor who has not put in any money in UTI schemes. ``And I will not do so in future too because I believe the fund managers are as good as individual investors. In many cases they simply invest on hype or work like

`goats'. They lack individual thinking and follow the likes of Mr H.M. or Mr K.P.''

Blaming the former UTI chief Mr. P. S. Subramaniam, this investor demands an explanation from him. ``I would blame the UTI for the current stock market crisis in India. During the last two years the UTI has sold fundamentally sound Old Economy stocks at rock-bottom prices and invested heavily in KP stocks without making a long-term study of either the industry or the companies. These KP stocks are relatively new entrants in Indian stock market and do not have any track record. A premier institution like the UTI should have exercised a lot of caution before investing heavily into KP stocks.''

He suggests that a thorough inquiry be conducted on the UTI's heavy investment in the KP stocks and the report submitted to Parliament.

Coming to pensioners who have invested their savings in this scheme, a Chennai-based retired Railway officer, Mr M. N. Kamath, is concerned, but not shattered, by this development. ``For one thing I do not have too many units. I invested in this scheme about 10 years ago and have a total of about 10,000 units. In the earlier years the dividend was good, but last year it came down to around 13.5 per cent. Of course, this year they are going to reduce it further.''

But even if the smaller investor is given an exit route, as seems likely, Mr Kamath will not liquidate his holding. He plans to hold on not because of any implicit faith in the UTI, but because of lack of other investment avenues. ``The NBFCs are not there and the return from bank deposits is anyway less than 10 per cent.''

(Would you like to share your experience as an investor? Write to us at bleditor@thehindu.co.in)