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Deferred bail-out

THE WINDOW FOR repurchase of up to 3,000 units that has been allowed by the Unit Trust of India is bound to be seen no more than as a small relief by the retail investors in US-64. Worse, they face the grim reality of NAV-based repurchase price six month s down the road.

This 3,000-unit package would cover 47 per cent of the unit capital of Rs 10,778 crore, according to indications from the UTI brass. Of course, it is not clear, as yet, who will be left holding the bag for this bail-out, which could add up to a hefty Rs 5,065 crore. Which is why the UTI has offered incentives to persuade investors to defer redemption. Though the starting repurchase price is 30 per cent lower than what it was in May 2001, it is at a premium of around 25-30 per cent to the current NAV.

The repurchase facility is structured to minimise redemptions in the short term. The implicit rate of return involved in tendering the units in May 2003 under the package is close to 10.5 per cent without any dividend and higher, depending on the level o f dividend that may be declared for 2001-02. The idea is to ease the strain on UTI's liquidity, and hope the stock market would recover to provide a better comfort level for the fund. Since the ``Government of India has agreed to stand fully behind UTI t o support implementation of the scheme for small holders,'' the repurchase scheme may be seen as having sovereign guarantee, and thus have the potential to retain investors. The package is official confirmation that all investor holdings in excess of 3,0 00 units would be switched to an NAV-based pricing mode. Much as it may hurt these investors, it is likely to be viewed in positive light. For it would settle one of the two big problems confronting the US-64: The anomalous pricing structure used earlier .

The inept portfolio management will, however, continue to remain an area of concern. This could lead to considerable redemption pressures once the NAV-based option is activated in January 2002. The residual corporate and high net worth investors are cert ain to pull out even if it means booking a loss. Liquidity may be rightly seen as more important, and in any case, there are unlikely to be any performance expectations to stay invested in the fund. The package also does not make it clear as to who would foot the bill. Prima facie, it appears the Centre has agreed to some kind of a bail-out package. However the charge on its accounts may be deferred till 2003. Till then any difficulty in meeting the repurchase may be spread across an assortment of finan cial institutions and banks the Government may summon. The UTI has made it clear that any deficit between the NAV and the applicable repurchase price would not lead to any NAV dilution. This may be of some comfort to the larger investors who account for 53 per cent of the capital base of Rs 10,778 crore. The liquidity package worked out addresses partly the losses suffered by the investors due to the anomalous pricing structure.

The probe should go beyond the issue of pricing. Some accountability needs to be fixed for the enormous lapses by the UTI over the years in the area of fund management. In addition, the impact that misrepresentations through advertising had on inflows of the fund also needs to be looked into. Only these could explain the gravity of the losses imposed on the US-64 investors. On its part, the UTI should look at the other schemes which are potential trouble spots and try and sort things out. There is also a need to appraise investors of the true state of affairs in its various schemes so that a nasty surprise is not sprung on them, a la the US-64.