I used to be quite a patriot, even a nationalist. Then came the rise to power of the Hindu joint family. Patriotism meant the intimidating of Muslims for Bal Thackeray, challenging Pakistan to a war for Madan Lal Khurana, giving streets the names of obscure terrorists for Sahib Singh Verma, the Pokhran ceremony for Atal Behari Vajpayee. Then my patriotism began to waver: if these people are patriots, I thought, I am a sumo wrestler (plagiarizing on Jagdish Bhagwati, who said in a meeting to Jaswant Singh, "Who are your economists? I have been asking around and have been given a couple of names. If those guys are economists, I am a Bharat Natyam dancer."
But patriotism is a very desirable emotion; it gives one a great high. So I worked out a way of feeling patriotic. Whenever I found my treason index rising dangerously, I would ring up one of my friends abroad, and start talking to them about the Pokhran ceremony. They would drip with such contempt and disgust for India that my flagging patriotism would be restored forthwith.
I guess my treason index was rearing up dangerously the other day when a neighbour rang me up. He said, he had put his savings in US-64; did I think he should withdraw them? I thought for a moment. Patriotism required that I should say no. After some agonizing, however, I made up my mind. I would prove my patriotism by not cashing my investments with Unit Trust of India. But I advised my neighbour to cash his US-64 units.
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Why? Because the repurchase price of the units is not sustainable. It might have been if their net asset value had not come out in the open - although institutions are pretty porous things, and would be ill advised to hide figures. But now that everyone knows that the net asset value is Rs 9.60 plus or minus 4 paise, it is impossible to engineer mass amnesia and make everyone forget this fact. Now, anyone who withdraws his money today will get Rs 14.40 or something close; so will everyone who withdraws before the fund's liquid assets are exhausted. After they are exhausted, an investor may try to withdraw his investment, but he will not get his money back. No one "" not Subrahmaniam, not Kelkar, not Sinha, not Vajpayee "" has said that he will. They all say that there is nothing to worry about. But they are all fooling the investor. If the investor were not to worry, someone responsible would have to say something more "" either that UTI would transfer funds from other schemes, or that its owners would
immediately put in more capital, or that the finance minister would finance UTI's losses. Someone respectable must give a credible promise, and in our political system, none is capable of giving one. So wha do they mean when they tell you not to worry? They are telling you not to withdraw your money, because if everyone does, it would cause them all severe embarrassment.
What then would happen if everyone tried to withdraw his money? Suddenly one day, UTI would stop paying out. The powerful ones would issue statements saying there is nothing to worry about, that the suspension is temporary, that UTI is a sound institution etc. But whatever is said, well established precedents would be followed "" the precedents of the mutual funds floated by nationalized banks which had promised minimum returns. They refused to pay the returns. Eventually, after much badgering by SEBI, after much toing and froing between the banks, Reserve Bank, the finance ministry, some paid. But in the meanwhile, there was much to worry about.
Assuming that you are quite unflappable and infinitely patient, would you finally get your money back? You probably would. For it is very unlikely that any government would contemplate the bankruptcy of UTI. The number of investors in it "" 12 million? 15 million? "" is simply too large for the government to contemplate abandoning them to capitalist rules. Just as Manmohan Singh poured money into bankrupt banks "" the more bankrupt they were the more they were rewarded "" Yashwant Sinha "" or his successor "" will finally cough up the funds. They will come out of taxes, out of additional prints of currency which would take money out of us in inflation, or out of borrowings.
So ultimately there is nothing to worry about. There are more important matters than the fate of the investor. Now that UTI is in a pickle, what will it do? How will it react? One reaction has already been announced: it will force its nominees upon the boards of the companies in which it has substantial holdings, it will threaten to sell of their shares, it will throw out the promoters and bring in new managers. This is a very commendable reaction. But the dividends on this strategy do not promise to be high. For one thing, the present crisis is as much a macroeconomic one as a crisis of management. Entire industries are in trouble; there is little that good managers can do about many of the companies. Just look at the companies to which US-64 has substantial exposure "" Reliance, ITC, HPCL, MTNL, TISCO, Indian Oil, L&T, ONGC, Grasim, Telco, HLL, SAIL "" what can UTI tell the CEOs of these companies about management that they do not know? Their troubles arise from the ongoing structural change in Indian
industry "" entire industries are getting obsolete or uncompetitive for no fault of their own, and even the best managers cannot do much. And secondly, there is a great shortage of good managers in India.
There are easier ways out, and UTI is more likely to take them. The NAV of US-64 would be equal to its sale price if the sensex were to rise to 4000. UTI will endeavour to raise it to that level. You may have noticed how the sensex keeps bouncing off a floor of 2800 and a ceiling of 3900. UTI keeps trying to raise it to the ceiling; as it nears the ceiling, punters sell their holdings and take profits. As it falls towards 2800, UTI starts buying. In this game the profit goes to the opportunist, and the loss to UTI. The game will stop before UTI bleeds to death, so investors should book profits "" or even losses "" whenever the sensex approaches 4000.
Second, UTI will try to move out of equity and into debt. This path is also not easy; for every shift from one to the other will entail larger losses on equity and lower yields on debt. But UTI, like all of us, has been badly bitten by US-64's shift into equity in 1994; it will seek refuge in debt.
And finally, UTI will try to raise more money from the public. For this is how all financial institutions try to survive when they go bankrupt: they find new bakras. UTI thinks it has great brand value. I would not pay UTI for its brand; let us see if there are any bakras around.