US-64: Who foots the bill?

Suresh Krishnamurthy

IN end-July, the UTI Chairman, Mr M. Damodaran, said the NAV of US-64 was not ``ascertainable''. He also said that even if the market did pick up before December, he did not expect to see any major difference between the NAV and the special repurchase price.

The Malegam Committee report, however, insists that there is a difference between the repurchase price and the NAV. This means the scheme's NAV has been ascertained. In addition, it has also indicated that arrangements have to be made to meet the shortfall.

In other words, there is no arrangement now to meet the shortfall. For investors staying with US-64, this is not a happy proposition. It now becomes important to know how the redemptions in US-64 were met since the announcement of the special scheme. If the difference between the NAV and the special repurchase price was met from the US-64 assets, it is contrary to the terms of the scheme announced in July.

It also means the NAV for the investors staying on would be affected not only by the decline in stock prices but also by the extent of redemptions in US-64. The situation cannot be redeemed fully, even if the Government makes good the amount eventually. This is because investors in US-64 would have been deprived of the funds for the period.

There are indications that redemptions from US-64 in August and September have not been much. However, this is because investors are likely to wait until May 2003 to redeem their units since the price for 3,000 units is guaranteed. If the Government, however, waits until May 2003 to honour its obligations under US-64, the loss to the investors staying on would be significant.

It may be that the shortfall is now being met by the Development Reserve Fund. However, this cannot be assumed and there is a case for the UTI to indicate how the shortfall is being funded and accounted as of now.

The issue has now assumed added importance because of the fall in equity prices since July 2001 when the special scheme was announced. The hopes that the US-64 NAV would rise may have been belied. This makes government support essential to bail out US-64.