BOMBAY, 9 July — We had heard about movies having sequels but never expected Unit Trust of India (UTI), India’s largest mutual fund, to run a sequel to its US-64 debacle. The nightmare which the fund had unleashed in 1999 seems to have come back once again to haunt the investors.
The horror began when UTI, faced with an onslaught of relentless redemptions, decided to suspend all sales and repurchases under its flagship scheme US-64 for 6 months as once again, its reserves were expected to be negative for 2000-01.
According to reports, UTI has faced redemptions in excess of Rs.40.00 billion in the quarter April-June 2001. On top of that, the flagship earned just Rs.15.23 billion as income, forcing it to cut its dividend to 10 percent (previous year: 13.75 percent).
Naturally, this sent shivers down the spine of all investors. US-64 fund is the nation’s largest mutual fund, alone accounting for about 15 percent of the assets of the entire Indian mutual fund industry. The move has hurt about 20 million retail investors in US-64 who have ploughed in their life’s savings in US-64.
After this news broke out, the Indian stock markets literally crashed, recording a 114 points fall. And then the government came into the picture and got into some damage salvation acts.
First came the news that it was looking at the option of allowing selective repurchase in US-64 at a price linked to the actual net asset value of US-64. This means that UTI opens an exclusive repurchase window for small investors, and each investor is allowed to redeem up to a certain amount (say Rs.10,000) every month.
Any investor who wants to redeem his US-64 units on an emergency basis can also do so under such a facility. Such repurchases may also come with a clause limiting the maximum pay-out by the Trust per month.
Though this idea was mooted, there was no word about the price at which these units would be bought. As of date, the price of US-64 is decided on the basis of the repurchase price offered by UTI. The current repurchase price is hovering around Rs.13. In the absence of the repurchase price, there will be no proper benchmark to decide the buy/sell price for US-64 on the bourses.
But before any decision could be made, the Chairman of UTI, P.S. Subramaniam, gave in his resignation. It was stated that his resignation was at the insistence of the Finance Minister (Sinha) which is why it was promptly accepted too. Now the new acting chairman of Unit Trust of India is K. G. Vassal and he has been asked by Sinha to work out measures to provide liquidity to small investors who put their money in the US-64 scheme.
The rumbles of this decision of UTI to suspend redemptions and sales in US-64 will be felt across other mutual funds and even a sunrise sector like pension funds is expected to be affected as it is targeted toward the middle class investors.
Moreover, the news that as many as 16 out of 18 UTI’s assured return monthly income plans are ruling below par has increased these investors’ anxiety manifolds.
After this, investors will find it difficult to place their trust in trusts like UTI or any other mutual fund from now on.
When investors do not get their hard-earned when they need it the most, naturally the confidence would take a bad beating! The worry is that if someone as big as UTI could do it, why not other institutions like IDBI and ICICI? UTI has over the years launched 147 different schemes to suit different investor needs with special focus on small investors and mobilized over Rs.1,500 billion. Till date, 60 schemes have been redeemed with redemption value of Rs.200 billion. This excludes the normal repurchase of units of over Rs.980 billion during the currency of schemes and dividend distribution of over Rs.530 billion made above market rates over the years.
UTI suspended sales of assured return schemes viz. CGGF 86, RUP II and SCUP and terminated the Rajlakshmi Unit Scheme 92 earlier than scheduled with a total fund size of over Rs.15.00 billion, in keeping with the regulatory requirements. With the launch of the UTI Mahila Unit Scheme with more favorable features, the sales under Grihalaxmi Unit Plan were suspended with effect from Jan. 26, 2001. Full redemptions were made in respect of nine schemes (viz. IISFUS 95, MIP 95 II, MIP 95 III, MIP 96, MIP 96 II, DIP 95, UGS 2000, MEP 91 and EOF 96) which matured during the year with a total fund size of Rs.23.80 billion.
By suspending redemptions in US-64 for six months, UTI has bought six months’ time for restructuring the US-64 scheme, reducing its equity component and then moving to a NAV-based scheme. But this is based on the hope that the stock markets would be up by the next six months. Given the current scenario, with a global recession setting in, this seems too optimistic. Infact UTI itself will be the first to sell huge quantities of equity in the next six months to meet the redemption pressures.
Analysts say that if the scheme re-opens six months from now, the NAV may well be below what it is today. And that will mean a further run on markets. There is a bail out package now being arranged by some of the Indian banks.
They are planning to lend loans to UTI at interest rates below the prime lending rates. The Trust needs close to Rs.13.00 billion to pay a 10 percent 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 MIP 96 (2) and an equity scheme, Equity Opportunity Fund have already matured and UTI will have to bear a redemption load of Rs.4.00-4.50 billion on these accounts.
There is no doubt that the government will have a rescue plan for UTI but then, investors have to look at UTI with a new perspective and think whether it is prudent to stay invested. Maybe fixed deposits in banks are safer options?
