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SUUTI selloff proceeds rightfully belong to Unit Trust investors

The Government of India is set to make a killing from the assets that it bought for a pittance from investors in US64 and other guaranteed schemes of the old UTI

Last week, there was a news item in this newspaper detailing how the government is planning to sell off the equity holdings in SU-UTI to help control the fiscal deficit. According to the report, sale of SU-UTI's holdings in companies like Axis Bank, ITC, Larsen & Toubro and others could bring in as much as Rs 47,000 crore within this fiscal year. In effect, this will be the final bonanza that the Government of India out of robbing the original investors of the Unit Scheme 64 and the guaranteed return products of the original Unit Trust of India.

For those who've forgotten the SUUTI story, this is a 'Special Undertaking - Unit Trust of India' that was formed in 2003 out of assets held by the schemes of the old Unit Trust that had to be rescued by the government, which were US64 and the guaranteed Monthly Income Plans.

This rescue meant that the the government took over the assets and made the investors an offer they couldn't refuse, in the sense of the movie 'Godfather'. Unit-holders were given the choice of either taking Rs 10 per unit or taking up five year tax-free bonds from which they would earn 6.75 per cent a year, effectively a total gain of Rs 38 for every hundred rupees invested. Even though the government managed to present it as a rescue, eventually the deal turned out to be a pretty sorry one for the investors and a good one for the government.

Those investors--most of them financially conservative small investors (aam aadmis, so to speak)--lost out because over the years, the government mismanaged the Unit Trust of India. Whether out of incompetence or malfeasance or the usual combination of both, these schemes was run to the ground and its assets were of a far lower value in 2003 than the Unit Trust was pretending.

However, the government did pretty well out of the assets it bought from those investors at what turned out to be a bargain basement price. First, in order to wash its hands off UTI, it sold it off for Rs 2000 crore to four public sector entities, Bank of Baroda, Life Insurance Corporation, State Bank of India and Punjab National Bank. Now, it will manage to get tens of thousands of crores out of assets that rightfully belong to those investors. By the way, these four also did pretty well for themselves by selling part of their stake to the American AMC T. Rowe Price.

The government supposedly mounted this rescue and gave the poor investors something. However, the fact that the investors lost out was not their fault. These weren't people who invested in some shady ponzi scheme. They trusted the Government of India and invested in that magnificent institution called the Unit Trust of India. Effectively, the government ran UTI to the ground, bought back the assets of its victims for a pittance by offering them a Hobson's choice, and is now ready to make a killing by selling off those assets when the equity markets are much higher.

The only fair conclusion of this story would be that the government should now wind up the SUUTI by selling its assets and then return the proceeds to the original investors. It can deduct whatever it paid on those bonds, but the profits on schemes' holdings rightfully belong to the investors who suffered so much because of the government. Of course, there's no chance of that actually happening because this is a taking kind of government and not a giving kind. When worthies like Mr. P. Chidambaram and Mr Raghuram Rajan next deliver one of their frequent scoldings to the Indian saver for not trusting financial assets, perhaps they should ponder the shabby treatment of the investors.

I only wish we had the kind of legal framework whereby the investors could have gotten together and filed a class action suit against the government. Or perhaps they should just call Mr. Kejriwal's hotline.