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Sunday, July 08, 2001













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Flurry of activity in US-64


S. Vaidya Nathan

IN A week of hectic developments, the Unit Trust of India (UTI) was once more well and truly in the dock.

Here is a summary of the events and attendant comments on the latest happenings in its flagship scheme, US-64.

UTI's actions: The UTI has suspended sale and repurchase facility in US-64 for six months till December 2001. This effectively means there will be no liquidity for investors, as this is an open-end scheme where the UTI used to buy back units at the repurchase price. This is now shut.

The UTI has indicated that given the heavy redemption in April and May and the downturn in the equity market, it had no choice but to choke liquidity. Had it moved to a net asset value (NAV)-based pricing earlier, it would have hurt investors. The mutual fund giant has also indicated that it would defend any litigation against it on the US-64 move.

The dividend for US-64 has been slashed to 10 per cent for 2000-01 as against 13.75 per cent in 1999-2000. The dividend yield on the July 2000 repurchase price of Rs 13.50 per unit works out to just 7.4 per cent _ the lowest since the 1990s.

It is also way below the return even the sovereign one- or two-year bond would have offered. If repurchase at a lower price is factored in, investors would have ended up in the red.

Investors who have opted for dividend re-investment can exercise the option when the scheme opens for sale or take cash or invest in other UTI schemes. Investors should take cash. The other two are poor choices.

The distribution of dividend is out of the income of Rs 1,523.83 crore. The unit capital of US-64 as of June 30, 2001 is Rs 12,778 crore, but the reserves are in negative territory.

The liquidity factor: The UTI has indicated that liquidity is available on account of a listing in the Wholesale Debt Market segment of the National Stock Exchange (NSE). Trading on this segment is difficult for the retail investors.

In addition, there is no basis for a proper price to emerge because the NAV is likely to be well below Rs 10, and the units may fetch a much lower price. The listing on a few other exchanges does not matter as the trading level in all stocks is poor at these exchanges.

Some banks have removed US-64 from the list of approved securities for advancing loans and others have raised the margin amount.

Big outflows: The US-64 scheme had big outflows of Rs 4,150 crore in April and May 2001. In 2000-01, the sales of fresh units was Rs 2,661 crore, repurchases Rs 5,962 crore and net outflows Rs 3,301 crore. Of the repurchases, Rs 4,151 crore was in end April-May 2001.

There is indication from the Finance Minister and the UTI Chairman that 90 per cent of the outflows were due to pull-outs by corporate investors. This raises serious questions as to whether there was some kind of informed trading.

Did select institutional investors get an inkling that the repurchase window was to be shut? Did this lead to a pull-out? This pullout by big-ticket investors is the most galling aspect. Even allowing for lack of incentives for dividend-stripping and some smart judgement, serious doubts remain. Was there a leak somewhere down the line?

UTI's planned moves: The UTI is to move to an NAV-based pricing system for US-64 before end of July 2002. For this it plans to transfer real estate (at present in US-64 books) to another vehicle, enabling calculation of NAV on a daily/weekly basis. The mutual fund had earlier planned to move to an NAV-based system by February 2001.

The decision to shut the US-64 window is ``to help UTI consolidate in the interim by readjustment of portfolio, strategic sale of block holdings in companies, more proactive management and hopes of market improving''. The US-64 portfolio has an exposure of 25.11 per cent (16.99 per cent in June 2000) to petrochemicals, 13.94 per cent (8.60 per cent) to FMCG stocks and 10.71 per cent (7.02 per cent) in refineries.

The UTI plans to make strategic sales of its holdings in key companies. A committee comprising of the Chairmen of the LIC, the UTI and the GIC and a UTI trustee, Mr R. P. Chitale, has been formed to help in strategic sale of large equity holdings. A Chief Investment Officer is to be appointed for US-64 with the back-up service of four senior general managers from within the UTI itself.

The UTI is not seeking any bailout from the Government. This was the line taken by the UTI Chairman, Mr P. S. Subramanyam at the time of the announcement. But subsequently, there are indications that the top management may not be averse to such a possibility. The UTI had been bailed out two years ago with a package aggregating Rs 3,300 crore.

What the government says: The Government will review the entire functioning of the Unit Trust of India (UTI) following its decision to suspend sale and repurchase of units under its flagship fund, US-64. The Government will take a view on the UTI restructuring after it gets the final report from the Corporate Re-positioning Committee headed by Mr Y. S. Malegham.

On the impact on small investors, the government, through the Finance Minister, Mr Yashwant Sinha, has stated that of the redemption in April-May 2001, 90 per cent was by large institutional investors and not small investors. The results are depressing, according to the Finance Minister, but the Government would prefer financial institutions to function on their own.

New Chairman: The rather unprecedented nature of the announcement also seemingly caught the government by surprise. At least, that was the impression conveyed to the public. Perhaps to deflect attention _ in the usual government fashion _ Mr Sinha wanted the UTI Chairman, Mr P. S. Subramanyam, replaced. The latter resigned.

The government expressed its lack of confidence in Mr Subramanyam managing the `affairs of the UTI'. A new acting Chairman, Mr K. G. Vassal, has been appointed. He is from the legal affairs department of the UTI. A new full-fledged Chairman may be appointed by the government after consultations with the IDBI. A revamp of the board is also on the cards.

New stance: The UTI, under its new acting Chairman, Mr K. G. Vassal, has indicated that it will look at a package to provide liquidity to investors who want an exit option. The Government had asked the UTI to work on such a scheme for liquidity to retail investors. The UTI has two weeks to come up with a package. The package will be implemented after the approval of the Finance Minister and the UTI board. The near-term agenda, according to the new Chairman, is to ``solely protect the interest of the small investors''.

A bailout package from the Government may also be an option before the Finance Ministry. The UTI has indicated that it could not restructure its portfolio to reduce the equity component in line with the Deepak Parekh Committee recommendations.

In a falling market, cutting the equity exposure would have led to further losses. The equity component is now 65 per cent in terms of net assets. The exposure is also high as the UTI had to use the debt portfolio to meet demands of liquidity. Effectively, the UTI is where it was at the time of the bailout in 1998-99.

Pic.: The UTI Acting Chairman, Mr K. G. Vassal, and other UTI officials on their way to meet the Finance Minister, Mr Yashwant Sinha, in New Delhi... ``Restoring investor confidence in the UTI'' is their immediate task.


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