Jul 9, 2001|
UTI: Welfare of small investor
That's no joke! It is among the objectives set out in the preamble of The Unit Trust of India (UTI) Act. The recent imbroglio has dominated the headlines over the past week and may continue to hit front page till North Block chalks out a revival strategy. Step one has seen a change at the helm with the UTI supremo ordered to submit his resignation papers. But will this lead to change in fortunes for the beleaguered mutual fund.
Much of the damage to UTI and the flagship scheme seems to have been done over the months May and June. Incidentally, or maybe not, a leading publication reported of the rot in UTI in early May '01, which could have sparked off the fear, at least, among the more savvy.
From the numbers that are being reported, some back of the envelope calculations could indicate the estimated net asset value (NAV) of the fund. The corpus size of US-64, at the start of May, was estimated at Rs 173 bn (30% of total assets managed) with approximately 15 bn units. Based on these numbers the estimated NAV was Rs 11.4.
However, UTI is reported to have repurchased units at Rs 14.2, which is Rs 2.7 more than the actual value. The beleaguered fund, US-64, over the past two months faced redemptions of approximately Rs 41.5 bn, which at the repurchase price leads to redemptions of 2.9 bn units. By repurchasing above the fair value, the Trust depleted reserves to the extent of Rs 8 bn. The erstwhile chairman, P.S. Subramanyam, has stated that reserves could be 'negative', insinuating that the fund is in trouble. Based on redemptions, total assets under management amounts to approximately Rs 131.5 bn on a reduced base of 12.2 bn units with a NAV of Rs 10.8.
UTI: Taking a beating
||Net cash flows*
U.S-64 has declared a dividend of 10% or Rs 1 per unit, which will result in a further out flow of Rs 13.4 bn including dividend tax. This number seems to tally with reports stating that the Trust is looking to raise funds of Rs 13 bn towards payment of dividend (reportedly footed by State Bank of India). Adjusting for dividends the assets under management reduce to Rs 118 bn with a NAV of Rs 9.7. However, some reports state that total assets under management are Rs 125 bn, after adjusting for dividends the NAV works out to Rs 9.1.
UTI has sought moratorium of six months to repair the damage implicitly indicating their expectations on market direction. To sew up the hole in US-64 and revert to May'01 repurchase price based on NAV the fund will need to augment assets under management (on same unit base) by an estimated Rs 54.3 bn to Rs 61.7 bn. The lifelines available to the fund are:
Bailout '01, déjà vu, similar to bail out '98 funded by the Government, which amounted to Rs 33 bn. Only this time the bill could be slightly steeper for Mr. Sinha. The finance minister has stated that small investors' interests would be protected. The statement could tantamount to funding, maybe partially, the bailout package. However, the development is in contrast to the earlier stand of not sponsoring any package.
Bull run on the market leading to a growth in US-64 assets. Based on the above numbers, for the NAV to rise to May '01 repurchase price levels, the asset prices have to rise by an estimated 46% to 55.3% (assuming unit correlation between the Sensex and US-64, the Sensex will have to rise to 4,811 - 5,117 levels for the fund to plug the hole). In any case, within six months, to recoup the losses will be a tough task.
Link NAV to repurchase and sale price, letting small investor take the hit. However, this does not seem very likely due to the large retail investor base of US-64 and the issue snowballing into a political hot potato.
A revival package could combine elements of all three. With financial engineering gaining steam, innovative ways are being identified to remedy the situation. Reports state one of the alternatives as splitting the fund into pure debt and equity schemes in proportion of the assets. This also solves the issue of rebalancing the portfolio. US-64 is primarily an income fund. However, the equity and debt assets are estimated to be in the ratio of 65:35. The fund needs a complete reversal in asset allocation to live-up to its income characteristics. Whatever be the upshot, attracting fresh investments could become doubly hard for UTI, as it is not a case of once bitten but twice bitten, always shy.
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