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Tuesday, July 31, 2001



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US-64: 3000-unit limit may be enhanced -- Mr M. Damodaran, Chairman, Unit Trust of India

Suresh Krishnamurthy

N. K. Kurup

THE position of the Chairman, Unit Trust of India, is the hottest seat in the financial sector now. Earlier this month, the Government appointed Mr M. Damodaran to the post. Some of his duties will involve trouble-shooting in the short-term. But there is also the need to set the UTI house in better order from the long-term perspective. In a wide-ranging interview, Mr M. Damodaran shares his views on UTI.

Excerpts from the interview:

In the US-64 package you have proposed, how is it possible to meet the difference between the net asset value and the repurchase price without financial support from the Government?

We have not yet determined or announced the NAV. The NAV will be announced on January 1, 2002. Should the market pick up by then we do not expect to see too much of a gap between the NAV and the price at which we repurchase the units.

Even when we announced the scheme, we had indicated that the Government would stand fully behind us as far as the implementation of the scheme for small investors was concerned. Should the requirement arise, we are confident the Government will assist us to the extent necessary. But my best guess is that the market will improve by then. The present fear that there is going to be a significant deficit between the NAV and the assured repurchase price might not exist at that point of time.

Then why not say that budgetary support will be required in that event?

It is not for me to announce whether there will be budgetary support. There is procedure and a time factor involved with budgetary support. I am sure that when the Government is talking of supporting the scheme that we have put through, it must be consid ering all the options, not excluding budgetary support at the appropriate time. However, this is a matter on which only the Finance Ministry can give you a clear indication.

Would you use the development reserve fund of the UTI (which offers a guarantee for the Monthly Income Plan)?

The development reserve fund has been made use of earlier to meet certain contingencies. It is not as if we would rely on the development reserve fund. We will address liquidity concerns, should they arise, by resorting to the line of credit from a large number of banks that have shown keen interest.

What is the logic behind the 3,000-unit limit? Why not less or more?

We looked at various figures. I would not say that we chose 3,000 straight away. Any figure below 3,000 would not make sense because it would be far too small. 3,000 is certainly not a big number, it ensures that a person would get even Rs 30,000 as soon as we announce the scheme.

The repurchase window has been opened in order to meet immediate liquidity requirements of those that have only this one source to access and no other source. Taking that into consideration, we thought 3,000 was a reasonable number to start with. I have indicated earlier that after seeing how this goes there is a possibility that we could move up to some other number.

In case there is a move up, will it also be at a similarly favourable pricing structure or would it be linked to NAV?

It would not be linked to the NAV. Basically, anyone can hold on till January and then exit at the NAV. Our intention is to observe the response to the present scheme. We believe, given the contents of the scheme plus the absolute non-availability of att ractive investment options in other mutual funds, only those with pressing liquidity concerns will exit.

If that happens there should be no problem for us to move on to 5,000 or some such number. At that level, if somebody needs more than Rs 30,000, say, Rs 50,000, it is only fair to consider such liquidity requirements.

Our entire scheme is based on the fact that except those who need funds immediately there is no reason for anyone to leave as staying with us is a more economically sound proposition than taking out money from here and investing it for lower returns. We have assured a floor level.

What is the number of investors in US-64? Is it 2 crore or 50 lakhs?

There are 2 crore unit holding accounts. That really is our strength.

What is the number of investors in US-64?

Well I cant give you a number at this point in time. We really need to look into that. We have a system which we are going to introduce shortly where we will be giving identification numbers to investors. At that time, we will be able to get an accurate number at any point of time.

We will bridge reality-perception gap

In the case of US-64 the lack of linkage to NAV has lead to substantial losses to investors due to pricing anomalies. Importantly, investors were not given to understand that they were investing in a balanced fund..

There has been as far as US-64 is concerned a gap between reality and perception of the nature of the fund. Over a period of 37 years, perhaps we have not adequately attempted to change the perception - that it is of the nature of a savings bank instrume nt with complete safety.

But the reality has always been that it is a balanced fund. The perception over time has been a little different. Our commitment now to move to NAV from January 2002 is an attempt over a phased time frame to change that perception. We cannot change the p erception of 37 years overnight.

Our objective at this point of time is to communicate to those who perceive the scheme differently from what it is as to what this scheme actually is. This will happen when we move to NAV effective January 2002.

In the interim, we will put in place arrangements which will ensure that even when we move to NAV, the interest of the investor is protected. Underlying all this is the attempt to give the investor the maximum value.

Even when we were not NAV linked and perhaps to that extent information was not available to the investor we were giving him returns which was much more than what the other instruments then available giving him.

But you were giving him only dividends. If you take the capital value of the units he would have suffered a loss.

Let us look at the perspective of the investor. If the investor came in with the perception that the instrument would give him assured returns over 37 years we have given assured returns. There has been no year when we have not given dividends. Even this year we have given him 10 per cent dividend. Therefore, the return to the investor has been good.

But total returns include dividends and capital appreciation. We cannot look at dividends in isolation.

But you tell me in the case of other funds has capital appreciation taken place.

If you look at it from the beginning of 1999, the value of US-95 has probably doubled. In the case of US-64, there is actually a decline in value even taking dividends into account.

There will be difference between performance of funds.

There are private sector mutual funds which have performed better than US-95....

There are private sector mutual funds which have performed worse than US-64. So you have private sector funds at both end of the spectrum. May be our funds are in-between.

But to say that US-64 has given good returns to investors is not the reality. People have lost money investing in US-64.

US-64 is a 37 year old scheme. Therefore, to judge the scheme in terms of what it gave investors who joined the scheme in the last two years and forget what it did for people who came not only in 1964 and even in the other earlier years will be unfair.

How long can you rest on past laurels..

This is not resting on past laurels. What we are attempting in the life of the fund now is a mid-course correction. In a long journey, you do make mid-course corrections. I think this is the time for mid-course corrections.

Underlying, all this is the interest of the common investors. If he came in 1964 or thereabouts with a perception that this a safe instrument which would give him returns. If you look back over 37 years, it has given both safety and returns.

He might be seeing a diminution in the value of the capital at this point of time. But to just look at the diminution in the value of two years and forget what it did for people who came not only in 1964 and other earlier years will be unfair.

In marketing US-64 from January, will you refrain from saying that it is a safe, liquid and assured return product.

We will market the scheme, we will advertise the scheme and we will communicate the perception that matches the reality of the scheme. We will ensure that this problem which is that we did not correct the perception is an aspect we will certainly address .

What about marketing of the scheme?

My intention is not to sell a large number of units after January because we would like the scheme to have a corpus of manageable size. If I sell a large number of units and I am not going to get into equity because my long-term direction is different, I must have enough of debt paper of acceptable quality to pick up also.

US-64 and MIPs are perceived as safe products by investors but they invest in equities. So, even if he got returns, theoretically he undertook more risk to get the return.

We have to see whether in terms of the mandate of the trust as well as the specific intention with which individual schemes were formulated, there has been any distortions. If there have been distortions, we will not correct them in a manner in which the re will be loss of value. They will certainly be corrected in a period of time in which we will not lose value. At the same time one of our major tasks is to improve communication with the investing community. Communicate to them our strengths which we h ave not communicated. Tell them that UTI has had an excellent track record in respect of several of its schemes. It is a strong organisation and it has delivered. May be you did not notice some of it because we did not communicate.

But how can you tell your MIP investor that your sectoral fund is the top performer and that we are good in fund management?

No, what we will tell him is that we have a very large number of schemes. Some have under performed. Some have performed better than others. It is my belief that we do not have investors who are invested in to just one of our schemes which might have don e badly. We would have investors who have reaped benefits from some of our better schemes. And it is not going to be difficult to tell that investor that you gained on some, may be you suffered a temporary loss on some. We are attending to that problem q uickly here. This family of UTI has invested in a number of schemes, most of which have seen good performance. It is not that as people are trying to project that there is a major crisis of confidence.

Your future MIPs, would the equity component be lower?

The original mandate of the trust is to mobilise small savings. If you mobilise small savings then I presume you must invest in a manner in which they are quite safe and not too much subject to the vagaries of the market. That will inform all our investm ent decisions hereafter. That will determine the composition of each of the funds.

Coming to other schemes of UTI such as MIPs, they may require more than Rs.2,000 crore to honour your obligations..

My feeling is and this is a view that is shared within the organisation is that if you take a snapshot as on today it would appear that we need funds though of not the order that you mention. Again, it is entirely likely that as the markets improve and b y the time the schemes are due for redemption, we will not be requiring that kind of money additionally. There is no cause for anxiety on that front. To the extent there is a problem it is something that we can manage by ourselves.

`US-64 has not done badly'

On the portfolio performance of US-64, you would have had a chance to look at it. What is your opinion?

Let me say that if you look at the way markets have performed US-64 has not done badly at all. This focus on US-64 and its performance and the various adjectives being used to describe it such as below par performance is only because of its size.

We have information to show two things. First, there are many funds, which have performed worse. Second, as far as UTI is concerned, some of our funds are either the best or the second best in their respective categories.

Let me also tell you that in our portfolio we have the best scrips that are available in the market in fairly large quantities. So, it is just the question of the markets looking up and you will suddenly find that US-64 will belie all criticism that is n ow being direct at it.

Are you going to continue to maintain the equity proportion in US-64?

On a long-term basis, we are not going to maintain the percentage holding of equity. These can happen in one of two ways. Either grow the debt portfolio over time.Or we reduce the equity portfolio not at the top end by dumping good shares but by exiting from some of those that have not added value.

UTI seems to be reticent to sell its holdings in the Reliance group while it has not been averse to selling other frontline stocks such as HLL and ITC.

Let me say that as far as strategy is concerned it is to maximise returns. As far as tactics are concerned, we are following the market closely. We are looking at our liquidity at the position and we are taking decision on what we should do from time to time.

There is a view that US-64 also had other responsibilities such as stabilising stock market prices.

As to whether US-64 was used to further policy considerations, I have not been here long enough to tell you definitely that it must have been used. I have also heard of this in the manner in which most people have heard. I have no evidence to show that t here was any constraint on the part of the fund managers to do what they should have done best in the interest of the fund.

Going forward,what would be your position on this aspect?

I am clear on this and the Government is clear on this as has come out through the statements of the finance minister and other senior government functionaries. The decisions of UTI are to be taken by UTI. We are a big player in the market. We must play in the market in the best interests of our constituency that is our investors whose funds are with us. The Government is hands off as far as operational decisions of UTI are concerned. That is not only the stated position, it is also the accepted positio n.

When do you think the markets will pick up?

I am optimistic the markets will move up in the course of the next 3-6 months.

What makes you think that the markets will remain at this level?

Well the monsoon is good. This will certainly do good to rural India. If rural India does better obviously there will be surpluses generated. There will be more demand and share values will look up. We also do expect major policy initiatives.

And also the fact that it has remained quite low for a long time and it is not in the interest of too many people this low for so long. Plus the fact that FIIs will find that this is a good market because of problems in some other countries where possibl y investment opportunities are not as attractive as they were a few months ago.

So, with all this coming in, I have a feeling that it should not take too much time for markets to go up. And when they go up, then the entire focus and the news coverage that US-64 is getting now would be a matter of the past.

But even if the markets go up, the positive impact on US-64 may be reduced if the equity proportion is brought down before January 2002

The equity proportion of US-64 is not going to be brought down in a hurry. That is not going to be in the interest of either US-64 or the markets.

But why do you take the markets into account?

Ultimately as a player in the market, a good market is in my interest. A depressed market over a long time period is not going to be in my interest either. I have to keep churning portfolios. I must be see a market that is vibrant.

But why can you not cut losses and get out?

One way which is not the best way of looking at things is let us cut losses and exit. Even if there was merit in the argument this is not possibly the time to exit because you will incur more losses than you will need to incur. And the other way is to ho ld for a while and see the market going up and then to move as the market requirements and the interests of the fund demands. Cutting losses and reducing the size of the portfolio is not an option that appeals to me at this point in time.

Do you not you think the markets have to move up by 60 to 70 per cent for the NAV to catch up with the repurchase price ?

It certainly does not have to move up by 60 or 70 per cent. The portfolio of US-64 includes some of the bigger players in the market. So, if the markets move up by much less than the figures that you have mentioned and I say much less though I do not wan t to put up a number on its at this point in time, the NAV of the fund will look much more healthy than it looks now.

But the proportion of equity is only 67 per cent and the 33 per cent debt can move up by only around 10 per cent. So, equity prices have to go up by much more to compensate for debt?

But it need not be 60 or 70 per cent. One is the market going up and the other within the market some of the better performers within the market doing better than the index. Either way, we stand to gain. I do not think we need that kind of an increase. C onsidering where the market is at present and has been for quite some time there is no reason to believe that in the foreseeable future it is going to remain at this level.

Will US-64 Be under SEBI ambit?

From January 2002 onwards when it becomes NAV-based, will it come under the SEBI ambit?

NAV-based trading is one of SEBI's basic requirements. When we move to nav and put a couple of things in place, we will be fully SEBI compliant. Not because we are under sebi but we are voluntarily complying. That is better than compulsory compliance.

But will US-64 be under SEBI regulation?

Even today, SEBI's inspection of UTI do cover US-64.

But will US-64 come under SEBI's ambit?

We are voluntarily complying with SEBI's regulations. Please also remember that during this period steps will be taken to amend the act and perhaps we could there look at provisions which might bring it under legally under SEBI's regulations.

But what is important is not whether we are legally under sebi but whether we are voluntarily complying with regulations. Regulations are in the interest of investor. If we go in for a regime of voluntary compliance which is total that is good enough for the investor.

Giving the portfolio a debt tilt

In the debt segment of US-64's portfolio, it appears that virtually only the Rs 3,300 crore SUS-99 portfolio (from the 1999 bail-out package) is left and other instruments have been sold. At a time when the value of the debt portfolio had been increasing selling the debt portfolio could also lead to loss in value for US-64?

SUS has not exhausted the entire debt portfolio. There is a little more than that. As far as sale is concerned decisions are taken based on the facts on the date the decisions are taken and also expectations about future. Therefore, for us to really look back and say that some thing should have been done or should not have been done is some thing that can be done in the case of all fund managers and all funds. And even today if you look at our track record across schemes with out focusing entirely on US -64, we have not only out performed the markets, we have also out performed p peers in several segments. Some how, that is a matter which possibly we have not communicated effectively.

Are you worried about liquidity in the debt market?

I am not worried about liquidity in the market. But if I have large quantum of funds and then there is not enough quality paper at that point in time then the funds will not lie around. They will find their way to equity markets and that will be inconsis tent.

But the private placement market is huge.

That is true. But quality.

What quality are you referring to?

We will be looking for certainly not just investment grade but a little better than that.

But private sector mutual funds have invested more than Rs.20,000 crore in top rated quality paper ?

If at that point of time, there is enough triple A paper we will certainly pick it up. That will give good returns with a higher degree of safety. We will have to do this correction of moving away from equity. I do not need a large corpus to do this. I c an get out of less rewarding equity and move in to debt also.

UTI's selling and illiquid stocks

There was an indication that you have stopped selling in the markets.

That is not true at all. We have not stopped selling in the markets, we have not stopped buying in the markets. Fund managers are doing what they are expected to do.

We have not been as active as in the past because today's market conditions itself are sluggish. It is only a matter of time before the markets move up and then you will really see what our grand design is in the market place.

You had indicated your intention to sell illiquid stocks back to promoters.

We would look at getting out of them in a manner consistent with our economic churning that is continuing. We are not going to throw them away. We are also not going to hold on to them indefinitely because they are not traded. We will look at ways to max imise value from those stocks by selling them at prices that are acceptable to us and not by dumping them.

What is the value of the illiquid stocks in your portfolio?

It is not too much. These are all small holdings. If you look at the number of scrips it will not give you an accurate idea. The top scrips are heavy weights in our portfolio in terms of value. But illiquid stocks are the ones which bringing up the small numbers at the end. It is really a question of reducing the number of scrips in our portfolio so that I can also track scrips better. A very large number of scrips are not going to be easy to track and that is the essence of fund management.

It is surprising that it has taken US-64 such a long time to come to this conclusion. For example, there are many funds in the private sector which started on the wrong foot and restructured their portfolio even before 1998.

I think with the benefit of hindsight one might say that this should have been done earlier. But I do not want at this point of time to second guess with the benefit of hindsight any decision that was taken in the past. Yes, certainly there were opportun ities for us to do in the past.

I think it has some thing also to do with our large size both of our holdings as well as our investors. We perhaps positioned ourselves a little differently. But, the picture is clear at this point in time. We are absolutely aware, not that there was no awareness earlier. We are going to translate that awareness to adoption in practice of reducing the number of scrips.

US-64 and US-95

In the case of US-64, it may be right to say that other funds have also done badly. But if you take US-64 as a balanced fund and compare it to US-95, another balanced fund from the stable of UTI, US-64 investors have lost heavily. Also, we can say that U S-64 performance has been in line with that of the markets only for the year beginning April 2000. If we take earlier years, US-95's performance stands out against US-64 in terms of value to the unit holder.

What you are saying that while US-64 has turned in an average performance US-95 has turned in an excellent performance. It is possible always that when we have as much funds as we have, investors in some funds will get better returns than some other fund s. A fair comparison is to see how this fund has performed in relation to other similar funds in the market.

But US-95 is a similar fund to US-64..

But the corpus is smaller. It has not had some of the problems associated with having been around for 37 years. Some of the problems will tend to have an impact on the management of the fund. A smaller, leaner fund of later vintage would definitely be ea sier to manage compared to US-64.

Trustees need to be complemented

With respect to the members of the Board of Trustees, why were they party to the resolution passed hastily three days before the closure of the scheme?

I think at a point in time the trustees took into consideration all the facts that were available to them and arrived at a decision. I am not going to second guess that now. But we realised quickly that in doing this freeze, we could be creating a situat ion that some of our investors might be inconvenienced. Therefore, a limited repurchase window has been opened.

But why did the board of trustees go along with an anti-investor move just three days before the board meeting?

I will not say that the board of trustees went along with an anti-investor measure. That matter in no area of decision making can you say we have taken an irrevocable decision which does not admit of any change for long periods thereafter. All decisions look at responses to certain other decisions, see what problems that might arise and see minor changes as you go along. I think it is a sign of healthy decision making that you make changes that are well-intentioned as additional information comes.

However, there are apprehensions about the functioning of board of trustees relating to the closure of the scheme..

The board of trustees is certainly a responsible body. The major issue that they addressed at that point of time was the problem of US-64. How to shift it to NAV, what kind of time frame was required and so on. It is likely that in the process of address ing this large issue the possibility that there could be liquidity needs of small investors might have escaped attention. I think instead of saying that the board of trustees did not think of this when they first took the decision, it is fair to complime nt them for quickly recognising this requirement and making a change. That is one way of looking at it and that's the way I choose to look at it.

Will corporate funds flow out?

From January 2002, corporate money is likely to go out of US-64. Do you think that will be a blessing in disguise? And the size of the fund can also shrink sharply?

I do not want to guess whether corporate money would go out or not. Our endeavour in the course of the next five months will be to see that their economic interests will be in staying with the scheme.

Why do you want corporate money to stay with you? This is a savings vehicle for small savers. Wont you be happy with corporate money flowing out?

I do not want sudden changes to the scheme. I do not want changes which will suddenly impact on the size or content of the scheme. I would rather that these changes come in a phased manner in which the scheme will be able to easily absorb the changes tha t are taking place. I think in such matters there is benefit in gradualism rather than in overnight changes.

Gradualism, no overnight changes

With respect to restructuring of US-64 what is the course that you would prefer?

As far as I myself am concerned, I am receiving suggestions from various sources. We have of course committees that are going to these aspects. We expect to receive the report of the corporate positioning committee soon. We will also receive some inputs from the Tarapore committee. We will pool all the suggestions that we have. There will be discussions at all levels within the organisation and with well-wishers of the organisation outside. And then we will put in those structural changes which are abso lutely necessary in order to cater to the interests of the investor there is benefit in gradualism rather than in overnight changes.

Will the restructuring of US-64 happen before January 2002?

Our intention is to see the direction in which we have to go will be decided. The implementation might take a little longer than that.

`Shocks have been given by others, not UTI'

UTI has a problem now. Instead of projecting an optimistic picture should you not communicate to investors what its problems, what it is doing to solve the problem and what are the risks faced by the investors. UTI has every right to be optimistic. At th e same time, should not the risk disclosures also be put in place? Is the investor not entitled to risk disclosures?

There is already adequate over-statement of the problem by several sources. We have a problem. I am not pretending that there is no problem. But the dimensions of the problem are not such as has been generally projected. Our intentions therefore is that instead of merely sitting back and telling the investor that there is a problem we will communicate to him what we are doing to get over the problem. Sooner rather than later the problem will be behind us. There is no reason therefore that investors that have stayed with us for long periods should be administered shocks more than they have been given, not by UTI, but by others. Our job is to see that we further increase investor confidence. And how we will do that is a matter we have suitably addressed.

You are saying the financial press is over playing what the problem is. Since you say investors trust you, why do not you come out and say what your problem is in terms of risk disclosures?

Over 37 years they have trusted us. And they will surely trust us to find a way out of the problem. And we are spending all our energies now on quickly putting this problem behind us. Instead of merely communicating an awareness of the problem to investo rs we will be able to tell him that this was the problem and this is how we put in behind us.

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