US-64: A survivor’s guide
A lifeline just about keeps investors afloat
Wither the trust?
What are the options for US-64 investors?
The primary objective of UTI, set up under a special act of Parliament in 1964, was to bring the small investor into the capital market. And till last year UTI accounted for nearly 65% (Rs 64239 crore) of assets under management in the mutual fund (MF) industry. US-64, an open ended fund ,accounts for about 25 % of UTI's assets and has two crore unit holders spread across 40-45 lakh investors. It is the oldest and that largest mutual fund in the country.
Back in 1998, when UTI's reserves were threatening to turn negative, UTI tapped the Reserve Bank of India to meet the redemption pressure. At one point of time the UTI also used the repo facility to the extent of Rs 1200 crore for a very short period. The high level expert committee set up with Deepak Parekh on the committee recommended that the scheme has to be net asset value (NAV) based.
Come July 2001 and again it was trouble time for the Trust. UTI suspended the sale and repurchase of its most popular and biggest fund, US-64 units from July 2 onwards, for a period of six months. This has left the small investors stranded with no way to liquidate their units for that period.
"UTI should have reduced the rate of interest but not freezed the sale and repurchase of the units. This gives a negative impression about the trust and the small investors are all panicky mainly because they invested in UTI for assured returns and that they could get it liquid in a reasonable time," says T K Doctor, a chartered accountant practicing in Mumbai. US-64 dividends has gone down to 10% from 13.75% last year.
UTI slashed the rate of return on MIP 95(I) and MIP 96(IV) to 5%for the current year owing to the adverse market conditions.
Why the six-month ban?
The six-month period was to be used to churn the US-64 portfolio and reduce its exposure to equities, which is currently estimated at 65 %.
Association of Mutual Funds in India (AMFI) president A P Kuriens said, "US-64 investors will have to bear with the UTI's decision to suspend sales and repurchase for six months in larger interest to allow the trust to restructure the assets and provide NAV-based prices."
The Liquidity crunch
UTI is looking at ways to overcome the liquidity crunch to pay-off the small investors. These include the RBI extending a special repo line to UTI in lieu of its portfolio of government securities, banks buying out the Trust's portfolio of triple A and double A rated bonds and UTI selling its real estate assets.
The Trust needs close to Rs 1,300 crore to pay a 10 %dividend next month to unit holders of its flagship scheme for the fiscal year ended June 30, 2001. Besides, two of its schemes, a monthly income scheme MIP96 (2) and an equity scheme, and an equity scheme, Equity Opportunity Fund, have already matured and UTI will have to bear a redemption load of Rs 400-Rs 450 crore on these accounts.
US-64 falls under the Securities Exchange Board of India (SEBI) list of scrips which are to be compulsorily traded in the dematerialised form. Up to 500 units can, however, be sold or bought through the odd-lot window even in the physical mode on NSE. UTI is likely to approach SEBI to seek a hike in the number of US-64 units that can be sold in the physical form on the stock exchanges.
Since most of the individual investors hold US-64units in the physical form, UTI, in consultation with SEBI and the finance ministry, is looking at the option of allowing them to buy or sell the units through the odd-lot window by raising the ceiling.
Redemptions
UTI's various schemes saw redemptions to the tune of Rs 2,265 crore in June, resulting in a net outflow of Rs 407 crore for the trust. US-64 was closed for repurchases and sales all throughout the month of June. For the first three months of the current fiscal, UTI's funds collected Rs 28,590.86 crore with redemptions to the tune of Rs 21,654.49 crore leaving the sector with a net inflow of Rs 6,936.37 crore.
In April and May, the bulk of the redemptions were accounted for by UTI's US-64 scheme.
During the just completed financial year, US-64 mobilised Rs 2,661 crore, while it redeemed through repurchase almost thrice that amount, Rs 5,952 crore. Of the total repurchase, 70% happened during April and May, i.e. in the weeks following the Ketan Parekh episode.
Corporate investors are estimated to constitute about 10 %of the total number of unit holders, but hold about a quarter of the outstanding units. It is known that many companies park their funds in this scheme, an attractive opportunity given the returns and the liquidity. But corporate treasury manager saw the writing on the wall that dividends could not be maintained after the stock market crash of March 2001, and it seemed to be enough reason why the corporate investors headed for the exit.
With uncertainty looming large over the NAV of US-64, there will be disproportionate sellers on the bourses. Moreover, in the absence of the NAV figure against which the traded price can be benchmarked, price will be driven by speculation. Panic selling will ensure that the traded price remains depressed. Effectively, there is no way an investor in the scheme can exit at a decent price. Nor has the dividend been respectable. The 10 %dividend on US-64 translates into a yield of 7.40 % on July 2000 prices. That's lower than the 8.5 % tax-free return on the RBI relief bond.
A suitable repurchase price
The UTI think-tank is exploring the options to arrive at the repurchase price for US-64 units for small investors. These include making the scheme net asset value (NAV)-based, continuing with the administered pricing and offering a premium on the NAV.
UTI is likely to peg the repurchase price of the US-64scheme at its face value (Rs 10 per unit) for small investors wanting to exit the scheme. Talks are still going on about the repurchase price, which may be fixed at the face value for a limited period of time.
"We are still in the process of deliberations," a top UTI official said, adding that several options are being considered. In the absence of the correct NAV, we have to make do with alternatives and it is for the board to finalise the best option that is fair to the investors wanting to exit.
The board will also deliberate on the definition of the "small investor" who will be eligible for the relief package. Investors holding up to 1,000 units of US-64 form almost 55 %of the total investor base.
UTI would be divesting certain holdings of the US-64 scheme to secure better prices. Non-permissible assets of the schemes including real estate would be transferred out of US-64 portfolio to shift to net asset value pricing, as prescribed by Deepak Parekh Committee. UTI has appointed an independent fund management body to ensure the most advantageous re-balancing of the portfolio.
Options for the small investors
The investors are in a dilemma on whether to hold on or sell the units since the NAV is not known, so there is no indicator of underlying value against which the traded price could be benchmarked. This could lead to very skewed pricing, in the absence of many takers for the units. Secondly, there is complete uncertainty about how the Trust is going to tackle this problem.
Small investors can think of trading their units on NSE, OTCEI and the Bangalore and Ahmedabad stock exchanges. Till now, since the Trust had provided liquidity through repurchase of units, there was hardly any trading in units.
The opening of the odd-lot window and increasing the limit could be seen as the first step towards protecting the small investors' interests although this might benefit only the first owners of the US-64 units because the subsequent buyers of units would not be able to sell them through this mode.
Besides the National Stock Exchange, where US-64 is traded in the wholesale debt market, it is also listed on the Delhi Stock Exchange, the Bangalore Stock Exchange (BgSE), the OTCEI and the Ahmedabad Stock Exchange (ASE). The Delhi Stock Exchange started trading in US-64 units in the debt segment under the demat mode and also opened the odd-lot window, which allowed investors to buy or sell a maximum of 500 US-64 units. Sources said there was demand forUS-64 units even at Rs 10 per unit. This was to facilitate small investors who did not have a demat account and possessed only physical units. Taking a cue from DSE, other stock exchanges like ASE, BgSE and OTCEI are also likely to open the odd-lot window.
Banks on a helping mode?
The State Bank of India (SBI) has continued to provide loans against units of the troubled US-64 scheme at its face value of Rs 10 per unit while taking a margin of 40 %. Individuals are allowed to avail loans of up to 60 % of the face value of the units and the maximum loan amount can be up to Rs 20 lakh for units in demat form. SBI, as yet, has not made the terms of financing more stringent and loans were given on the same terms and conditions as applicable to financing against shares and debentures.
Banks are extending loans against Unit Trust of India's US-64 scheme at a steep discount to the unit's face value of Rs 10. This is besides the minimum 40 %margin at which the loans are being given. Bank of India is offering loans against US-64 pegging the face value at Rs 5. In other words, offering a US-64 unit, carrying a face value of Rs 10,as collateral, an investor can get a loan of Rs 3 only.
Dena Bank has decided to freeze extending loans against the security of the units.
UTI Bank, too, is offering loans against units of US-64. It has an outstanding of around Rs 1.30 crore on the US -64 scheme.
Other private sector banks are reviewing the situation. However the major problem which these banks are facing is the issue of pricing. Some of the banks, which had earlier extended loans against the scheme, are also keeping a close watch on any possible depreciation in the repurchase price.
Brought under SEBI purview
The UTI Act has been amended to bring US-64 under the purview of the Securities and Exchange Board of India. Most of the schemes of UTI, except US-64, are regulated by SEBI. However, unlike other mutual funds, which are regulated by the securities watchdog, UTI is not functioning as per the SEBI norms.
Because of the perception that legislative oversight superseded regulatory oversight, US-64 and a few other schemes of UTI were kept out of SEBI's jurisdiction (although schemes launched after the empowerment of SEBI in1992 were brought under its supervision).
The name still holds?
According to a study carried out between July and October 2000 by the Society of Capital Market Research and Development about investor preferences, among mutual fund schemes, 46% named US-64 as the best. Sixty-six % of the respondents named UTI as the best mutual fund organisation.
Individual investors had not seen the permanence and symbol of safety so cruelly broken though the evidence was all there for those discerning enough. How could they think otherwise of one that paid a premium over the risk-free rate without appearing to offer any risk, as well as complete liquidity at a guaranteed repurchase price. This trust may not go away completely, as people still believe that the government will come forward to save the fund yet.
In August 2002, the government worked out another rescue package of Rs 14,561 crore to enable it to meet the shortfall between the NAV and repurchase prices of US-64 and other assured-return schemes. It also offered certain tax concessions such as tax-free dividends and exemption from capital gain tax to enthuse unitholders to stay with US-64 beyond May 2003.
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