India's UTI puts freeze on flagship unit

About 7 percent of Indian households invest in the stock market

NEW DELHI, India -- India's largest mutual fund manager, the Unit Trust of India, has put a six-month freeze on buying and selling units in its biggest fund.

It says the freeze on its flagship US-64 fund is designed to give it breathing space.

State-run UTI is the largest single investor in Indian markets, controlling more than $12.7 billion (600 billion rupees).

About a quarter of that is invested through the US-64 fund, which is India's biggest and accounts for about 15 percent of the domestic mutual fund industry's assets.

But declining performance has seen a sharp rise in withdrawals.

UTI chairman P.S. Subramanyam said 26.61 billion rupees ($564.6 million) of units were bought during the year to June 30, while redemptions totaled 59.62 billion rupees ($1.27 billion).

Reserves may be 'negative'

Subramanyam told a news conference in Delhi Monday that reserves of the US-64 fund may be "negative."

That means reserves built up in previous years may have been exhausted and the investment portfolio itself depleted by redeeming units at above net asset value.

"We don't know as yet. We are still calculating the figures. But they might turn negative for the past year," Subramanyam said.

"This is a massive blow to investors' confidence," said Dhirendra Kumar, managing director of Value Research India, a company which tracks mutual fund performance.

A recent survey of the Indian equities market showed that 12.8 million or 8 percent of all Indian households had invested directly in shares or debentures. Of the 8 percent, about 7 percent was in shares.

Banks, gold rated as safest by investors

The survey showed that households ranked bank fixed deposits as the safest, followed by gold and then US-64 units.

In March, UTI lauded the performance of its US-64 fund, saying that net sales were up 63 percent in the year to the end of February 2001, and the number of investors in the scheme had risen from 771,000 to 870,000.

Subramanyam said Monday both redemptions and sales of new units in the fund had been suspended for six months, until December 31.

He also said the dividend to be paid on the fund for the past year was cut to 10 percent, from 13.75 percent the previous year.

Expectations that UTI was to slash both the dividend and repurchase price of US-64 recently triggered a sharp rise in redemptions.

The Business Standard daily reported last week that UTI saw a net outflow of $410 million in May as companies shifted from US-64 to bank deposits and other investments.

UTI said on Monday that during April-May 2001 the scheme had significant repurchases of about 41.5 billion rupees or $881 million.

Switch to net asset value calculation

Subramanyam said UTI would begin using the net asset value of the fund to calculate the redemption price by next June at the latest. It previously had been expected to begin pegging the repurchase price to net asset value by next February.

UTI currently does not disclose the fund's NAV. Analysts estimate the NAV per unit to be below 10 rupees, a third less than the redemption price of 14.25 rupees paid in May.

Vivek Reddy, chief executive officer of Madras-based Kothari Pioneer Asset Management Co, said the ban on redemptions and the fund performance data released by UTI would rattle Indian markets.

Analysts say investors' reaction to the problems facing US-64 may be magnified by the fact that until now, investing in the scheme was viewed as being virtually as safe as putting money in a bank.

The scheme has the longest history of uninterrupted dividend payout in the domestic fund industry.

Reuters contributed to this report.