India bails out Unit Trust

The government will raise money via bond sales

The Indian government has promised to bail out the country's largest mutual fund, Unit Trust of India (UTI), to the tune of 145bn rupees (1.9bn; $2.94bn).

The government stepped in to help state-owned UTI repay pensioners and small investors in assured return schemes, said Finance Minister Jaswant Singh.

It will raise the bailout funds by selling bonds to prevent it from burdening the country's national budget.

In addition, UTI will be split into two companies: One will contain all the funds which are to be bailed out while the other, which will be privatised, will hang on to the remainder of UTI's schemes, Mr Singh explained.

"The package has addressed immediate worries of investors who had reposed faith in UTI, specially senior citizens who had invested their life savings in assured schemes," said Indian Association of Mutual Funds chairman A. Kurien.

Redemption freeze

UTI, which manages about half the $20bn assets in India's mutual fund industry, faces severe liquidity problems due to falling stock markets which have eroded the value of its investments, and due to bad debts.

The Cabinet Committee on Economic Affairs, which was chaired by Prime Minister Atal Behari, estimated that UTI is short of 85.61bn rupees on assured income schemes and a further 60bn rupees for its largest fund, the US64 scheme.

Last July, a stock market scam set off a wave of panic run on the US64 scheme which forced UTI to put a freeze on redemptions redemptions.

The freeze caused a national uproar and was partially lifted until May 2003 in response, though the cost of redemptions rose.

"It has been decided that all earlier commitments regarding US64 will be extended beyond May 2003," Mr Singh said.

Restoring confidence

The government may offer tax incentives to investors in the US64 scheme in a move to rebuild confidence in UTI and rebuild both private and state-run funds' depleted cash piles.

"It's a good step forward," said Value Research fund tracking firm's managing director, Dhirendra Kumar.

"The package eliminates persistent ambiguity and investors can now derive solace on their investment in US-64 and assured schemes."