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US-64 bailout – A letdown for investors

Jul 16, 2001

The Unit Trust of India (UTI) has released details of the much-anticipated bailout package. And like other news coming out of UTI lately, this is also a big letdown for investors. First details of the bailout. According to a press release that we have received directly from UTI, this is what the bailout is all about.

All US–64 unitholders as on June 30, 2001 will be able to sell upto 3,000 units per unitholder at any time during the period August 1, 2001 to May 31, 2003 at the assured price or the net asset value (NAV) whichever is higher. The repurchase price in August 2001 will be at par Rs 10 and it will increase by 10 paisa on a monthly basis till May 2003.

From January 2002, US-64 will be NAV-based, but the assured price mechanism will be in force till May 2003. Investors can redeem at the minimum assured price or the NAV whichever is higher upto a ceiling of 3,000 units. Investors can sell their units in excess of 3,000 at the NAV-based prices from January 2002. From August 2001 to December 2001, unitholders can sell the excess of 3,000 units only in the secondary market.

According to the press release, UTI will redeem units after January 2002 till March 2003 at the minimum repurchase price or NAV whichever is higher. If the minimum repurchase price is higher than the NAV, the press release states that the deficit will be met and funded from external sources. Given that US-64 has negative reserves, this seems almost certain.

The package is designed to make investors stay long enough with the scheme to collect the dividend (at about 10%) and exit at a higher repurchase price, which escalates by 10 paisa every month.

The package is a disappointment on two counts. First, the repurchase price of Rs 10 is way below the US-64 repurchase of Rs 14.55, which was the entry price in May 2001. So an investor who bought US-64 in May 2001 at Rs 14.55 has found his investment depreciated by over 30% in less than 2 months! There seems to be no rationale in the Rs 10 exit price that is being offered now, just like there was no rationale in the Rs 14.55 repurchase price in May 2001.

Secondly, the 3,000-units ceiling for exit till May 2003 is too low. The number of units should have been a lot higher. Given the rumours mills that are abuzz with corporates having exited when the going was good, it is the small investor who is left in the lurch. To quote Mr Sanjay Sachdev (CEO and MD of IDBI-PRINCIPAL Asset Management Company), ‘the (small) investor is the last person who finds out.’

On the whole, the bailout package is a sorry attempt at placating the small investor. The package will make him stay longer with US-64, which is exactly what he does not want. Right now his only bet may be to collect the dividend and exit at a higher repurchase price. Frankly this is no package, its a comprise.

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