US-64: A survivor’s guide
A lifeline just about keeps investors afloat
US-64 rescue package: A panel discussion
2 July 2001 was a historic day for the capital market for more than one way. Besides the new rules of trading (rolling settlement for 409 scrips, no carry forward, options trading in 31 stocks), UTI announced that it was suspending repurchase and sale of US-64 units, the oldest mutual scheme, for six months. Despite the warnings of the fund reserves turning negative, UTI chairman, P S Subramanyam, announced a dividend of 10%, slightly lower than 13.75% last year. The news, though shocking, was not totally unexpected.
The resultant panic among US-64 investors and allegations of mis-management of the scheme ultimately led to a forced resignation of Subramanyam.
It may be recalled that a similar problem had risen with US-64 in September 1998, when the UTI chief made it public that the reserves in US-64 had turned negative to over Rs 1,000 crore. The government had no choice but to bail-out the scheme by offering a revival package featuring an infusion of Rs 3,300 crore. A high level committee was constituted under the chairmanship of Deepak Parekh, chairman of HDFC. In its report submitted shortly, UTI was asked to make a serious effort in minimum disclosure requirements. The demand was to make the public monolith start declaring its NAV at least once a month. Of the 19 recommendations, 16 of them were accepted and implemented successfully while the rest are still on paper since they required the UTI Act to be amended.
This time, too, the finance ministry quickly rolled out a rescue package to protect the interests of small investors. As per the package, investors can offer up to 3,000 units for repurchase between August 2001 and May 2003. The repurchase price in August has been fixed at Rs 10 per unit to be increased by 10 paise every month. UTI will reopen for fresh sales and repurchases at NAV-based prices from January 2002. Further, units in excess of 3,000 can be sold in the secondary market between August and December 2001; while from January next year they can be sold at NAV-linked prices.
Capital Market spoke to a panel of experts to gauge their views on the impact of the fiasco on mutual funds in general, and UTI in particular, and what the bail-out package means for small investors. Excerpts:
Rajesh Mokashy, executive director, CARE
Well, something needed to be done for investors. I feel that all mutual fund schemes
should be NAV-linked and the rescue package is more of a transition towards that solution.
The question of benefit to investors does not arise in this kind of a crisis situation. We all know that we do not need such crises to learn. But only when such situations arise, we think of such packages that work towards transiting towards a better phase.
And it is not as though investors haven’t burnt their fingers and lost money in other mutual funds, be it public or private. But the anomaly crept in this particular scheme only because of the pricing of the fund which was all along separate from its NAV. Mutual funds are market-driven investments, and if the markets do not do well, it leads to lower realisations of NAV.
As far as the bail-out package goes, we had to begin somewhere. And the infusion of Rs 3,000 crore is a decent figure. UTI has a certain time-plan in mind to bail out investors.
A good thing the government has done is it has not discriminated between corporates or individuals. At such times, we cannot treat them differently.
Lastly, based on experience, the regulations of all schemes being NAV-linked, should cover all mutual funds. The sooner this is done, the better.
Joseph Massey, managing director, Inter-Connected Stock Exchange of India (ICSEI)
From the earlier stance of disbanding the scheme altogether for 6 months and then the
thought of providing liquidity to 3,000 units, the package at least provides some relief
to investors. Considering the need to provide some liberty to investors in such
circumstances, the package seems to be the best option.
But, unfortunately, besides resulting in temporary setback in the market, the entire episode has led to a crisis of confidence in the minds of investors. But the rescue package further puts him in a dilemma. There is a big question mark dangling in front of him on what is right and what is not. This is almost akin to a run on a bank which provides a red alert.
We do not know the average size of an investor in US-64. The real problem is that if the huge principal amount of US-64 is at stake, then the government needs to differentiate between corporate and individual investors by asking the former to hold to their units on while allowing individual and small investors to exit. It may be unfair from the view point of an institutional investor, but we have to look at it from the crisis point of view. Until US-64 is made NAV-linked, no fresh money is expected to flow in.
But an initial rescue package having been worked out, I feel the government will get cracking for the balance relief measures once the market improves. The government should look at securitisation of UTI assets. With the kind of involvement the government is showing, it looks like they will not allow this issue to linger on for long.
I was waiting to look at the AMFI reaction to this entire episode. So far everyone kept saying that small investors should adopt the mutual fund route rather than direct participation in the markets. With UTI itself being troubled, there are serious implications and almost a red-letter alert on other mutual funds. One never assumed that risks of such kinds may also arise in mutual funds. Henceforth, I feel mutual funds will be treated as equally risky. Besides, it will be unfair on the part of the government to bail-out other such funds in trouble. Hence, the move should be towards making all schemes NAV-based which will serve as an industry yardstick.
Niamatullah, managing director, SBI Mutual Fund
US-64 was always seen as a product with trust. Now if such a scheme lands up in trouble,
the general impression is that the government will come for its rescue. With the US-64
imbroglio, the focus may of investors will turn towards other funds.
If such a scheme goes open-ended and starts declaring its NAV, then it becomes on par with other funds which proves it all. In such a scenario, other mutual funds have to sell themselves successfully to be able to sustain themselves in the market. It depends on who sells what and in what manner.
In such a scenario, besides the quality of performance, other important things are the strength of the fund house, quality of service and credibility of the fund manager.
Ved Prakash Chaturvedi, managing director, Cholamandalam Cazenove Asset Management
We often tend to take one incident and get concerned. UTI is the largest fund in India,
and hence, what is good for UTI is good for the entire industry. So I do not think that
the UTI episode will benefit other funds in any way.
Being the largest player, it is necessary for UTI to remain healthy and vibrant. We have to keep in mind that UTI, and also US-64, has survived for 35 long years. US-64 is the oldest scheme with the largest investor base. Thus, a one-time problem in the scheme should not overshadow its entire performance. We have to respect the scheme.
The mutual fund penetration in India today stands at 4-5% and is expected to swell to 30% in the next 15 years. So one can see that there is a huge opportunity to grow for everyone in the industry. Keeping this in mind, we hope that UTI is able to come out of the trouble soon which in turn proves beneficial for the entire industry. As far as the rescue package offered by the government is concerned, I suppose that was the best option available at that point of time.
A P Kurian, chairman, Association of Mutual Funds in India (Amfi)
I firmly believe that the US-64 debacle will not affect the mutual fund industry in
general. The current crisis is more product-specific. US-64 accounted for 20% of UTI’s
assets and represents 17% of the industry assets. There are the 87 other UTI schemes which
are performing well.
US-64 scheme was positioned in a different manner assuring safety, regular returns, liquidity and tax benefit. Its pricing was not NAV driven but administered. It had been weak since 1998 but the situation has erupted only now. And should be restructured as any normal scheme falling under the purview of Sebi.
I do not think that investors are losing faith in the mutual fund industry in general since they have witnessed and gradually accepted the meltdown in other equity schemes too. Investors make investment decisions depending upon their risk-return profile, and hence, are mature enough to judge the facts and grasp the reality.
Shailendra Bhandari, managing director, Prudential ICICI Asset Management
There is a basic difference between other mutual fund schemes and US-64. Firstly US-64 was
not NAV-driven like other schemes. The repurchase price paid was higher than what the
scheme could generate. Secondly, US-64 did not fall under Sebi regulation.
I do not think investors will shy away from the mutual fund industry due to the US-64 imbroglio. We have almost 3.5 lakh investors who have trusted faith in us and opted for our schemes. I do not think they will switch over from mutual funds altogether just because of the crises situation we are currently facing.
Chandrashekhar Sathe, CEO, Kotak Mahindra Mutual Fund
I feel that UTI is an integral part of the mutual fund industry. Most of the problems
faced by US-64 are burdens of the past. This burden can be thrown away only by moving
towards NAV based transactions. UTI is vigorously working towards that. The event will not
affect the industry adversely. In fact, I believe it will spur the growth of the industry
through the creation of a level playing field and greater awareness of risks inherent in
capital market assets. Investors are realising that in a market-driven economy (with
lesser and lesser of state control and protection), only professional management,
efficiency and transparency will help investors with managing their savings properly. With
the refinement in MF regulations and emergence of good practices and corporate governance,
the industry is poised for much higher growth.
No doubt, investor confidence has received a setback. But the same can get restored quickly. Any turn around in the equity markets will hasten the process.
The question is not private versus public sector. One should recognise that the days of monopoly are over and the Government's limitations on fiduciary responsibilities are becoming clearer. Therefore, only those funds, whether in the private or public sector, who offer better service, good performance, clear communication about risks, adherence to investment objectives and transparency will be favoured.
Dhirendra Kumar, mutual fund expert
The entire US-64 episode is absolutely disappointing. The rescue package gives back
investors a part of their money while the rest is eroded. There’s a huge erosion of
confidence in UTI. The episode has left a distaste in investors.
But this will have absolutely no impact on other mutual funds since they are not being looked at or perceived the same as UTI. Other mutual funds have managed to create a niche for themselves. And the way they are approaching the market is entirely different. They do not get involved in messy things like these nor do they have faulty price mechanisms. Why talk of other other mutual funds, even some other schemes of UTI are different. The problem is only US-64 which is too slow and not able to do things right.
Talking about the rescue package, there is no rescue in it for investors at all. The losses are for investors only. Agreed that the package gives some money to investors for their units, but that’s no favour on investors.
As a matter of fact, I feel that the earlier version of disbanding the scheme for 6 months and then starting with a clean slate was much better. At least, the investors had some hope that the Trust would work on a suitable alternative. The package offered by the government leads to erosion of capital for investors. The price of Rs 14 in May this year has stood fallen to Rs 10 which is a clear net loss to investors.
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