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Friday, July 06, 2001



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US-64: Big Daddy throws in the towel

V. Pattabhi Ram

WE MUST doff a hat at the Big Daddy of the mutual fund industry, the Unit Trust of India (UTI). On the day the bourses gave up badla (exchange), the grand old fund unleashed its version of badla (revenge) on the hapless investor. It chose to do what no m utual fund can ever dream of doing -- traffic-jam a flagship scheme.

By saying a firm `No' to providing a two-way quote to US-64, by far the most popular of schemes (notwithstanding its low-key performance in recent years) the UTI has breached a trust. And that's putting it mildly. What has sent shock shivers among invest ors is that the UTI is no Johnny-come-lately, having been in business for almost four decades. In short, it should have known better and done better.

Emotions apart, did the UTI really have a choice? There are many who sell the story line that there is no need for a song and dance over the UTI announcement. After all, all that has happened is that an open-ended scheme has been converted into a close-e nded one. But remember, reserves at US-64 have turned negative. This means the bottom has fallen off US-64 and its NAV has dipped below par.

Under the circumstances, the UTI can ill afford to buy (repurchase, in UTI-speak) US-64 at a premium to NAV. If the repurchase price is slashed and brought closer to the NAV, the stink would hit the roof and investors would make a beeline for their money .

As the UTI is not exactly sitting on a pile of cash, it would have to turn a heavy seller at the bourses. This would take the market further south, accelerate US-64's downward slide and lead to a run on the fund, an ignominy the UTI should be spared. Hen ce, the decision. QED.

That's an extremely readable, if not an exactly great argument so long as it is not your money that is locked up. Well, even if it is someone else's money that is now getting jammed, one needs to ask the UTI a series of questions.

Did the UTI, for instance, not know many years ago -- 1998, to be precise -- that some time in 2001 it would have to move to an NAV-based pricing system? It now claims that it is seeking to borrow six months time to shore up its NAV so that the investor does not lose his money.

Well, how does it propose to do that in a nose-diving market? And pray, what did it do all these years? Why did it not use the God-sent opportunity that came its way in December 1999-January 2000, when its NAV crossed the repurchase price mark to move to an NAV-based system? Was it sheer greed of the kind small investors are accused of or was it professional negligence?

Did the UTI not know that it was skating on thin ice when it continued, despite howls from analysts, to repurchase units at prices higher than the NAV? Did this not amount to robbing existing investors because, mathematically, repurchase at a price highe r than NAV has the effect of diminishing the NAV? Knowing full well that time was fast catching up with it for NAV-based trading, did this practice not amount to pulling a fast one on its 20-million-strong family of US-64 investors?

At a 10 per cent dividend on the May 1 sale price of Rs 14.55, does the investor not pick up a measly yield of about 7 per cent? Isn't that less than the yield on RBI bonds, less than what PPF offers, less than what post-office MIAS pay and less even tha n the return on corporate fixed deposits?

Well, it is understandable that people lose money in money management. But nowhere, absolutely nowhere in the world, do open-end funds stop giving investors an exit route. After all, liquidity is the cornerstone of mutual fund investing.

The claim that investors have an exit route via the NSE debt market won't wash because those who will now pick units there, given the current state of health of US-64, are going to be arbitrageurs; and arbitrageurs are sure to extract their pound of fles h. I would love to be proved wrong but I don't believe there will be a great market for US-64 at the bourses. If all this isn't bad enough, you may not now be in a position to leverage your US-64 holding as banks and other institutions are likely to stop lending against US-64.

The UTI now says it will use the interregnum to effect sale of strategic holding. This would, in effect, mean the UTI would sell off shares made over to it by management under the firm faith that these would not be sold off to competitors.

It looks like the UTI might now choose to breach that trust or force managements to buy back those shares because its house is on fire. As it turns into a big seller in its `Operation Restructure' it is going to take the market downwards along with it un less some knight in shining armour steps in with a long-term perspective.

So, whichever way the investor turns, he receives a Cassius Clay-like punch. And the one to blame is, of course, the big daddy of mutual fund investing, the one that carries trust as its middle name, the Unit Trust of India. The unfortunate part is that the Finance Minister, Mr Yashwant Sinha, says all aspects of the UTI's decision would be looked into, raising the question why they haven't already been looked into. Some public-spirited investor is sure to haul the UTI over the coals by taking it to cou rt.

First the 1998 bailout, later the flop show with Global Trust Bank, then the K-10 look-alike portfolio and now, this. Surely, it will be a long time before investors begin to trust the Trust again. And that's sad, given the UTI's four-decade-old honey-mo neying with the investor.

(The author is a Chennai-based chartered accountant.)

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