View from Delhi: Markets remain cool to new offer on UTI scheme

US-64 does not stand for United States, though many people mistakenly thought so when a mutual fund scheme with that name was launched by the government some years ago, at a time when the stock markets were booming.

The government had set up a special agency called Unit Trust of India (UTl) which offered guaranteed returns through assured repurchase prices. For 20 million investors it was the nearest thing to a goose that lay golden eggs.

When the stock markets tanked, the scheme came unstuck and the government could not meet its obligations. There were riots in Bombay as anxious investors lined up outside UTI's offices to cash their units, and the man who headed UTI was sacked. But the investors continued to worry about their investments.

Last week the government took a deep breath and announced that it would honour the guarantees as long as the scheme remained in operation, even though it would have to borrow heavily to meet the difference between the assured price (Rs12 per unit) and the NAV (net asset value) of less than Rs6.

The bailout will cost the government over Rs.15,000 crore, unless stock markets perk up, which is most unlikely.

US-64 holders will get Rs.12 a unit for the first 5,000 units and Rs.10 thereafter. They will also get some tax sops including exemption from capital gains tax. But there will be no more fresh issues of US-64 units and the scheme will die out when the last holder sells his units.

Also, UTI will be split into two parts, one, UTI-I, which will deal with US-64, and two, UTI-II, which will be privatised.

The markets have been cool to the new offer. The sensex did move a little on the day the new scheme was announced but is now back to old levels. Taxpayers are worried about where the money will come from for redemption. The government says there will be no fresh taxes, but considering the huge amounts involved, you cannot take the government at its face value.

Meanwhile, a war of words has broken out over the privatisation of two state-owned oil companies, Bharat Petroleum and Hindustan Petroleum.

While the disinvestment ministry is keen to go ahead with privatisation, which is after all its main job, there are others who are advising caution.

These people, who include George Fernandes as well as finance minister Jaswant Singh have called for a review of the privatisation policy and some are even asking for a thorough examination of economic reforms before pushing ahead.

Things are getting tough for those who have put their money into fixed deposits as interest rates are dwindling. Most foreign banks offer no more than about six per cent for one year's deposit, which is only two percentage points more than interest rate on savings account.

The rates at which you borrow money have also come down sharply. The HDFC group, which controls 50 per cent of the housing finance market is now offering loans for 10.5 per cent, the lowest in many years. Other companies and banks are also doing the same.

Low interest rates were all right as long as prices remained stable but it is not the case any more. All that cash sloshing in the market is raising prices all around, including vegetables and cooking oils. Vegetables are about 25 per cent higher than they used to be at the start of the summer. Potatoes are Rs15 a kg. Petrol prices are about to touch Rs30 a litre in Delhi.

In Kerala, electricity prices were doubled overnight but the government has been forced to back off because of public outcry and the hike has been cancelled. Money may be cheap but life continues to be dear!