US-64: The core issues

S. Vaidya Nathan

BEFORE going ahead with the exercise of privatising UTI, the Malegam Committee has stressed that US-64 be made NAV-based. This may happen in January 2002. Also of interest is the recommendation that provision be made for the gap between the repurchase price under the Special Liquidity Package and the NAV.

The Special Liquidity Package offers repurchase at pre-determined prices till May 2003 for holdings of up to 3,000 units. These account for 47 per cent of US-64, amounting to Rs 6,010 crore.

With the repurchase price is now well above the NAV and set to rise to Rs 12 per unit in May 2003, a gap is certain to open up, unless there is a repeat of the steep bull of early 1999 to March 2000. But that appears unlikely over the next year or so.

Click here for Chart

The UTI had, in its Special Liquidity Package, stated that the plan would be implemented such that the gap between the NAV and the repurchase price does not deplete the value of holdings of US-64 investors. This will be possible only if the government steps in with a bailout package to cover the gap. Thus, the bailout may have been planned for May 2003, or thereabouts.

But the Committee has said this should be done before any restructuring. The reasons are obvious: no strategic partner is likely to take up a role if this problem is not settled.

Despite the assurance in the Special Liquidity Package, it is interesting to note the Committee's observation that: ``If this shortfall is charged to the US-64 scheme, the NAV would be further depressed and will affect both those who hold units in excess of 3,000 units as also the future shortfall''.

As such, when the NAV-based repurchase facility opens in January 2002, it can be expected to be well below the face value of Rs 10 per unit. If the shortfall is also charged to the scheme, the NAV would be lower still. There is a need to set at rest any doubts on this score.

A repositioning of US-64 may also be on the cards though this is not explicitly recommended. But the Committee's observations represent the first official attempt at setting in simple and factual terms what has been known for at least six years. The Committee has this to say on US-64's position:

``It is also a matter for consideration whether US-64 can survive in its present form. It is perceived pre-dominantly as a savings instrument and its investor profile is determined on that basis. However, the pre-dominance of equity in its asset portfolio makes it more like a growth fund. Therefore, recognition has to be given to the fact that US-64 has in fact become a growth fund and, given its investment portfolio, its ability to declare dividends and give returns to unitholders is severely restricted'.

If this has the effect of a more factual presentation of the scheme's profile by the UTI in its US-64 advertisements in the future, that would be a positive step forward.