US-64: A survivor’s guide

A lifeline just about keeps investors afloat

Other schemes mired in controversy

Rajalakshmi Unit Scheme
Rajlakshmi Unit Scheme, launched by UTI in 1992-93, was a scheme for the girl child below 5 years with an initial corpus of Rs 1,500 crore. At the time of its launch, it had assured a sum on attainment of maturity.

Investors were ensured a return ranging from 16.16%-16.75% upto September 30, 2000, for a period of eight years since its launch. Unfortunately, the declining interest rate scenario witnessed since 1992 hit the scheme adversely. And UTI found it increasingly difficult to adhere to its 16% assured return.

Hence, in early 1994, it thought of disbanding the scheme as the best solution. The decision to wind up the scheme, though amidst a lot of hue and cry, seems like a step in the right direction in retrospect to put the country's largest mutual fund's house in order. But the worst part was that it set a precedence for other assured return schemes with unsustainable returns.

UTI offered investors Children Career Plan as an alternative to Rajlakshmi, but the return here was lower at around 13% p.a. Another option investors had was to redeem their investment at the buyback price, which roughly worked out to 16% p.a.

Morgan Stanley Growth Fund
From the bag of US-based Morgan Stanley Asset Management, Morgan Stanley Growth Fund had created history when it closed its subscription in three days flat in January 1994. It collected a huge Rs 981 crore as corpus, as against the target of Rs 300 crore.

Even before the scheme had received a formal approval from Sebi, on its launch, word-of-mouth publicity had created a grey market for the units of MSGF. Interestingly, the fund collected the entire targetted corpus on the first day itself, thanks to the serpentine queues of investors outside bank counters to subscribe.

And to the dismay of investors, the first NAV declared three months later was Rs 8.98 - below its par value of Rs 10. This was further accompanied by the nose-diving of the value of units on getting listed. When the fund started investing in the equity markets, the Sensex was at 3,900 and dipped 15% in two months which has reflected on the NAV. Fund managers of MSGF had a herculean task on hand to deploy a huge sum in the secondary market. Its NAV, as on 18 July, was Rs 10.37.

Ind Prakash
Launched by IndFund Management in May 1992, IndPrakash was a close-ended scheme which indicated a rising dividend of 16% in 1996-97, 16.25% in 1997-98 and 16.50% in 1998-99. The offer document had stated under the head 'return on investment' that the scheme had two plans. Plan A included an 'indicative' rate of return to investors payable annually, while Plan B offered a cumulative rate of return based on the indicative return.

However, when struck in an era of declining interest rate scenario, officials at IndFund Management asserted that the return under the scheme was merely 'indicative' and not an 'assured' return. They also said that the indicative returns were not guaranteed by the mutual fund or the sponsor bank, nor has any representation been made to the public by the AMC,  which purports to be a warranty or guarantee for a return. It was made clear to investors through the offer document that their investment was subject to market risks.

In a reply to investors seeking clarification, the fund indicated that the change in the investment valuation method, due to the revised Sebi regulations, made it mandatory for the fund to mark its investments to the market.

IndPrakash somehow managed to meet promises up to 1996, but was unable do so since then. Hence, the fund failed to honour its commitments in 1997 and 1998 due to lack of profits. During 1997-98, the scheme did not have sufficient surplus even for distribution of dividend. Citing paucity of profits, IndPrakash did not pay dividends amounting to Rs 18.31 crore for 1998-99, Rs 18.30 crore for 1997-98 and Rs 18.83 crore for the year 1996-97.

The scheme ended with a net deficit of Rs 23.04 crore in 1996-97 with no dividend for the year. The Rs 13-crore paid-up capital of the AMC was highly insufficient to bail-out the fund. Finally, on 30 November 1999, when the scheme was due for redemption, Sebi ordered the fund to redeem it at its NAV. The fund perforce had to pay nearly Rs 40 crore towards redemption and Rs 70 crore for payment of unpaid dividends for three years.

Cantriple Plus
Cantriple Plus, launched in end of 1991 by Canbank Investment Management, was a five-year close-ended scheme which promised to treble the investment of unitholders in a span of 90 months, ie, seven-and-a-half years, thus offering a return of 14.9% a year.

Cantriple Plus appreciated by over 100% in two years of its launch. However, since touching a peak of Rs 21 in January 1994, its NAV dipped 26% to Rs 15 at the time of redemption.

Based on its NAV, the fund faced a shortfall of Rs 400 crore to meet its assured return promised to investors. Fulfilling its promise would have required the fund a payout of Rs 11 billion, although the scheme’s assets were hardly Rs 5.9 billion. Finally, the parent entity forced the shareholders of Canara Bank to raise Rs 5.3 billion to enable the fund to meet its promises.

Magnum Triple
Magnum Triple was another close-ended scheme which promised assured returns to its investors equal to three times the face value of Rs 100. With an investor base of 1.65 lakh, Magnum Triple, floated by SBI Mutual Fund, had a net corpus of Rs 185 crore. At a time when most schemes were trading at discounts to their NAVs, the NAV of Magnum Triple was surprisingly at a huge Rs 185, against a face value of Rs 100.

However, the NAV dwindled since then making it difficult for the fund to honour its commitment of Rs 300 per unit at the time of redemption. Sebi intervened by asserting that the fund will have to pay assured returns under any circumstances. SBI Magnum Triple Plus was then quoting at an NAV of Rs 181.05, a shortfall of Rs 118.95 per unit.

The fund thought it best to revamp the scheme altogether and aggressively churned its portfolio, making the NAV move up 18.5%. From Rs 195 in 1 January 1999, the NAV rose to Rs 231 on 16 April 1999. It managed to touch an all-time high of Rs 239 on 2 April, but it still faced a shortfall.

With no option left at the time of its redemption in May 1999, the AMC offered unitholders in Magnum Triple the assuredreturn, of which Rs 126 crore was contributed by SBI.

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