Late Extra: Double disaster near for investors in India

A double disaster is set to dampen Indian investors' confidencewhen the regulatory authorities give the nod to the Unit Trust of India (UTI) and to the Life Insurance Corporation (LIC) to withdraw some of the assured returns schemes they floated in the past few decades.

Assured returns are no longer sustainable in the present economic meltdown worldwide and India is no exception. That, however, will be of little comfort to the investors who reposed their faith in the two financial entities, especially as they were under the Government of India umbrella and, therefore, assumed to be secure.

Even as a commission of inquiry examines the evidence responsible for the debacle of the UTI and after the bifurcation of the institution in February, the woes of the investors continue to mount.

Rumours about the impending disaster were rife in financial circles but hit the headlines on June 16. UTI-1 had been given permission by the Indian government to foreclose seven assured return schemes as distinct from the institution's flagship mutual fund, the US-64. Now only the nod from Securities Exchange Board of India (Sebi) is needed.

The rationale is these schemes were floated with a promised assured return of between 13 and 14 per cent. If these schemes were to be honoured and, going by the current market rates, the Indian government would have to pick up the tab amounting to nearly Rs80 billion. The latter figure could mount.

What the investors cannot swallow is that while announcing the foreclosure, the UTI management has not thought it fit to name which of the schemes will be hit. Ambiguity is playing havoc with investor psyche but who cares.

The government of India-appointed administrator, M. Damodaran, told the press on June 19: "We have the right to terminate the schemes as they were launched when the interest rates were high."

His second pronouncement adds more salt to the investors' wounds. He gloats over the fact that "we also have the necessary court verdicts in our support." His bold statement is based on the court verdict through which UTI successfully terminated the Rajlakshmi Unit Scheme (RUS-92) in 1993.

The latter scheme was floated on a sales pitch of providing financial security for the 'girl child' on reaching maturity. That was just 10 years ago.

In the new millennium, that is this year the UTI is being less discriminatory. At least one scheme, which has been named as destined for the chopping block, is the Children Gift Growth Fund since the victims will be both male and female children.

It is such a pity as parents had invested in the hope that when their child comes of age, the funds from the scheme could be utilised for higher education and a host of other necessities. That now will not be.

On top of all this investor ire is understandable because the UTI has still not decided how it will repay the investors. The 'maybe' cash refund, 'maybe' a bond with tax breaks is still dangling in the air. As for the future planning of the kids, Indians will do as they have always done, blame it on their fate. The other UTI schemes are reported to be monthly income plans but specifics are yet to announced.

Meanwhile, UTI has announced the launch of new funds. One of them named the UTI Liquid Fund will be on offer from tomorrow and close the next day. There are others in the offing.

If in the past week the news from the Unit Trust of India was disturbing then that from the other hallowed institution, the Life Insurance Corporation of India, is more so. The LIC, too, is in financial difficulties, though it took some corrective action quite early.

Despite those measures taken by the LIC, the government's decision to allow private insurance companies to operate in the domestic market has left the sole retailer of life insurance in the country high and dry with its market share plummeting.

What amazes me most is that while resident Indians are still grappling with the shocks they got last week, finance companies and institutions are flying out in droves to the Gulf over the past few months. The Gulf-based NRIs are expected to be easy targets, flush with funds which as far as they are concerned are non-performing assets. It is this psyche of the Gulf NRI that is being targeted.

Over the past six months Gulf NRIs have accounted for substantial forex inflows into India to take advantage of the interest rate disparity. Some reports claim that NRIs have been borrowing from foreign banks operating in the Gulf and then parking those funds in India, to make a quick killing. One report, however, warns that foreign banks, which may have been forthcoming until now may be considering that most of them are now "nearing their limit for India country-risk".

NRIs need to keep a close watch on their future investment plans, lest they, too, become victims in the 'Great Assured Returns Chase'.

The author is a writer based in India.