Chairman of India's troubled UTI quits

About 7 percent of Indian households invest directly in shares

By staff and wire reports

NEW DELHI, India -- The chairman of India's largest mutual fund manager, the Unit Trust of India, P.S. Subramanyam, has resigned, a finance ministry official said Wednesday.

Subramanyam's move follows the shock decision by UTI late on Monday to freeze sales and redemptions from its flagship US-64 fund for up to six months.

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

The US-64 fund is India's single biggest fund and accounts for about 15 percent of the domestic mutual fund industry's assets. But declining performance has seen a sharp rise in withdrawals recently.

Subramanyam 'asked to resign'

VIDEO CNN's Satinder Bindra looks at how the recent events at India's UTI has shaken up local investors Play video (QuickTime, Real or Windows Media)

India's Economic Times reported Wednesday that Subramanyam had been asked by the finance ministry on Tuesday night to resign.

He confirmed he had quit, telling Reuters in Mumbai: "I have put in my papers and the government has accepted my resignation."

Indian television reported that UTI executive director K.G. Vassal was appointed acting chairman.

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

Finance Minister Yashwant Sinha said Tuesday the UTI situation was disturbing and he was scrutinizing its decision to suspend sales and repurchases for up to six months.

CII attacks suspension decision

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Subramanyam said on Monday that 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).

The president of the Confederation of Indian Industry, Sanjiv Goenka attacked UTI's decision to suspend trading in US-64 units.

Goenka said it "virtually amounted to a breach of faith and fiduciary responsibility, no different from a bank suddenly deciding to shut its windows and leaving depositors in a lurch."

He said the sudden moratorium would seriously affect the confidence of small investors.

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.

But 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.

Switch to net asset value calculation

Subramanyam said Monday that 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.

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.