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Should the Government be Making Money on US-64 Bonds?

Using the capital of US-64 bonds, the government has made far more money than the bondholders

I often write articles that talk about aggrieved investors who have some reason to complain about how their investments have turned out. This article too has an aggrieved investor in it. However, this times it’s is an organisation which you wouldn’t normally think of as an investor—the Communist Party of India (Marxist). I remember a conversation I had with senior CPI (M) leader Nilotpal Basu about five years ago. At the time, he was a member of the Joint Parliamentary Commission (JPC) that was looking into the US-64 fiasco. While talking about how investors had suffered losses on account of the government’s mismanagement of the UTI, Mr. Basu mentioned that some of his party’s funds too had been in US-64 and were suddenly worth nowhere close to what they should have been. Now, there’s no point going into the irony of a communist party’s capital being eroded by stock market problems. However, five eventful years later, it turns out that the Government of India has made huge profits out of the deal that it offered to US-64 unit-holders. The capital that was used to generate these profits once belonged to the old UTI’s unit-holders. I think it only fair and ethical that a share of the returns generated in the wonderful boom-time on the Indian stock markets should be shared with the all unit-holders, including the CPI (M).

Jokes apart, I believe this is a serious issue. It isn’t being seen in the media yet, but I hope that changes. Let’s recap the facts of the case. In 2003, the Unit Trust of India and its US-64 scheme was in terrible shape. Rather than face the public backlash that would have happened had unit-holders lost their money, the government gave the a rescue package. Under this rescue package, they could either redeem their units at a price ranging from Rs 10 to Rs 12 (depending on their investment size), or alternatively, accept tax-free bonds created for the purpose. These bonds earned 6.75 per cent per annum.

The government assumed all risks associated with US-64 investment portfolio. This portfolio’s investment management was given over to UTI Mutual Fund, the new fund company that was created out of the debris of the Unit Trust. Over the next five years, this portfolio has seen gains far in excess of the government’s liabilities in the bonds. While the latest figures are not yet available, a rough estimate would put the government’s profits at no less than Rs 18,000 crore. This is actually more than the amount that was originally put into the government’s hands by the bondholders.

To make the scale clearer, consider an investor who started with Rs 1 lakh in these bonds. Over these years, he would have received Rs 38,000 as interest and now he will get back Rs 1 lakh back as redemption. However, even after redemption, the government would still get to keep at least another Rs 1 lakh that it has earned out of investing his money. And this is a conservative estimate; I think the government’s real profit on the deal could actually be higher. If the government was just another money manager which was in this business for profits, its logic for keeping the money would be strong—it took the risk, so it should get the profits. However, the government is not just another money manager. US-64 investors have lost a lot because of the incompetence and malfeasance of various Unit Trust managements appointed and overseen by the government. It is utterly unethical for the government to profit out of this whole affair. It’s really as simple as that.

Legally, the government is well within its rights to keep the money. However, this is an issue on which the political leadership needs to be big-hearted. US-64 investors were generally financially conservative small investors who were scared of the losses that the big bad stock market could bring. What has happened to them is tragic. To most of them, the extra returns would be extremely meaningful. These are not day-trading gamblers who are losing their fun money. Many of them are retirees to whom the events of 2003 came as a huge shock. I personally know a number of them who had to cut their household budgets solely because of the US-64 debacle. The new generation of fund investors would hardly believe this but once upon a time US-64 was the gold standard of safe investing into which many people used to put all their savings.

The government claims to have rescued those people but the reality is that it’s the stock market that has rescued the government. The only fair course is for it to deduct all its expenses and hand over the profits to its rightful owners. Including the CPI (M).