Vajpayee: "Nothing to do with UTI"

UTI chairman M. Damodaran said on Tuesday it would not be pressured into selling stocks and bonds to raise the cash needed to meet redemptions and that it has arranged a large line of credit.

Prime Minister Atal Behari Vajpayee offered to resign on Tuesday, with one of the reasons given being the government's handling of the UTI crisis.

But on Wednesday he sought to distance himself from the issue: "The Prime Minister's Office has nothing to do with UTI and its functioning."

Fund managing

State-run UTI, which managed 720bn rupees (�10.7bn) in assets at the start of this year, shocked its 43 million investors and the financial markets when it froze redemptions from the US-64 fund on 2 July.

Damodaran: "No other safer investment"

It blamed heavy redemptions by corporate investors, who had allegedly acted on inside information, and the plummeting Indian stock markets, which have also been hit by similar allegations.

The suspension forced the government to sack the chairman, P.S. Subramanayam, who was arrested along with two directors for their suspected involvement in a 320 million rupee ($3.8m) investment fraud.

On 15 July, UTI announced it would allow private investors to redeem up to 3,000 units from 1 August to ease the impact of the freeze on small investors.

Twenty million individuals or households account for 99% of UTI's investors but the corporate investors are thought to have accounted for about 40% of the fund's value.

'No other safer investment'

The chairman of UTI on Tuesday said there was "no other safer investment".

Nineteen state-run banks have offered support to the mutual fund, led by the State Bank of India, which has already lent 15bn rupees.

But Mr Damodaran acknowledged UTI was facing a cash shortage because of the difference between the net asset value of US-64 and the guaranteed purchase price offered to investors.

An upturn in the stock market would help UTI cover the shortfall - given that the average value of a unit has plunged below the face value of ten rupees.

"I am optimistic about the market and hope that the market will improve soon," Mr Damodaran said.

But that could take some time. The Bombay Stock Exchange is among the worst performing markets in Asia this year, having slumped nearly 17% since the start of the year.