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Gulf Indians demand higher returns from UTI

Pradeep Mallik in Ahmedabad

A financial scam affecting India's largest mutual fund has found an echo in the Gulf, with Indian investors demanding higher returns and warning of a run on bank deposits.

The Overseas Indians Economic Forum of the United Arab Emirates has demanded a higher redemption price than has been offered by the Unit Trust of India for its US-64 scheme.

About 20 million investors have been hit hard since the UTI dramatically announced a freeze on redemption of its flagship US-64 scheme. Following public outcry, the UTI has since started buying back the units.

The forum, in a communication to Finance Minister Yashwant Sinha, also warned that financial scams could lead to an outflow of money deposited by non-resident Indians in Indian banks.

The Gulf region has one million NRIs. Between them, they are estimated to have invested Rs 12.5 billion in UTI, the bulk of it in US-64.

Most purchases were made at Rs 14 to Rs 18 per unit. The redemption price of Rs10 per unit that UTI is now offering would lead to heavy losses for investors, OIEF-UAE chairman Ismail Hukkawala said in his memorandum from Dubai.

UTI's practice of paying above-market returns in the wake of sharp declines in share prices has periodically caused major problems.

"Many smart corporate operators exited the scheme in May 2001. They took with them the funds that rightfully belonged to hapless small investors, whose only mistake was they remained loyal to the institution. Hence, to ensure justice and equity to small investors, we propose that the May 2001 redemption price (Rs 14.25 per unit) may be paid to all existing investors," the memorandum said.

"We are worried about our bank deposits too. The same situation may arise even with our deposits as in India there is only law but no order," OIEF-UAE investor liaison committee chairman Bharatbhai Shah said on telephone from Dubai.

"Once our country loses its image and reputation as a safe country for investment, there will an outflow of bank deposits," Shah warned.

To enable it recover from the scam, the forum said UTI could fix a time frame of six to nine months, or even a year, after which an assured price should be paid to investors.

"Alternatively, if the UTI requires time to improve the performance of US-64 and restructure its investments, a minimum dividend of 12 per cent should be declared for the next two years. After that, a minimum redemption rate of Rs 14 per unit may be given to investors. This declaration has to come now," the memorandum said.

"If remedial measures are not taken immediately we are afraid it will create a negative impact on the various bank deposit schemes. After all, the reputation, image and integrity and the trust of the country has to be kept intact."

Pointing out that NRIs in the Gulf were going through a bad patch, the memorandum said: "Many of us are going through adverse circumstances. Retrenchments are high and the salary is down. Still, we have continued to support UTI unflinchingly and whatever savings could be generated after making our ends meet, have been diverted to US-64.

"The recent unexpected and unfortunate happenings in UTI have shocked us. The UTI has marketed US-64 all along citing three factors: safety, liquidity and high returns. Today we find that all the three traits have disappeared."

Indo-Asian News Service

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