Search the Internet          Tips  Sites: Finance, Investment

Who'll counter the Unit Trust of India?

N Mahalakshmi

Most market participants believe that Unit Trust of India's persistent selling of shares in the market has been one of the key reasons for the depressed state of the equity markets.

In truth, what UTI has sold till now, is only a drop in the ocean. The big-time selling is yet to come. As a matter of fact, securities worth at least Rs 7,800 crore, are in the pipeline, waiting their turn to be offloaded in the market.

Consider this: UTI's beleaguered fund, Unit Scheme 64, has a portfolio size of Rs 126.62 billion, out of which Rs 80.50 billion was deployed in equities as on June 30, 2002. On the same date, the scheme's unit capital was Rs 124.47 billion and reserves was negative Rs 44.76 billion.

The scheme had bank borrowings to the tune of Rs 31.25 billion. In all, gross investments to the extent of Rs 54.12 billion have been funded by borrowings.

The fund had borrowed money from banks and other schemes of UTI as it attempted to meet redemption pressure without selling off securities in the market, given the glum conditions.

Next year, however, in May 2003 -- when the government pays a redemption price of Rs 10 (Rs 12 for investors holding less than 5,000 units) to all investors who were invested in the scheme as on 30 June, 2001 - there will, inevitably, be a huge exodus from the fund.

As things stand now, there is little likelihood of US- 64 making any extra-ordinary gains which will push its net asset value to anywhere close to Rs 10. Also, since the scheme - and the Trust - have received so much negative publicity, it's unlikely that many investors will want to stay with the fund beyond 2003.

"Value" arguments hold no water, as there are many equity funds out there available "cheap" - if that was ever a consideration for buying into a mutual fund.

In fact, the lack of investor interest in US 64 in its new avatar of a "NAV-linked fund" is apparent from the fact that it has attracted hardly any inflows since October 2001, when it opened its sale window offering a NAV-based price. Needless to say, US-64 still pales in comparison to its private sector peers, in more ways than one.

To cut a long story short, UTI will have to go and fetch "cash" from the market to pay its investors when major redemption obligations come up in May 2003.

While the government will fund the shortfall in the scheme's asset value and assured price, US-64 has to bring in its share of cash, which is still locked up in the form of securities in the fund.

In other words, UTI will have to sell its holdings worth at least Rs 78 billion (total value of investments minus borrowings).

Besides, about four of UTI's monthly income plans will mature by June 2003; these have a combined equity holdings of Rs 5 billion.

Again, one Master equity plan (MEP 93) with a corpus of Rs 1.50 billion has to be redeemed in March 2003. All this will only add to the amount of stocks to be sold in the market.

Can the market bear this sort of pressure? Clearly, foreign institutional investors could counter this selling pressure, but right now, they display no signs of entering the market in any big way.

Domestic mutual funds are still relatively small in size to absorb this kind of selling pressure in stocks. None of the domestic financial institutions, except Life Insurance Corporation, have been active buyers in the market for a while now. And retail investors haven't been forthcoming either.

UTI's proposal to sell its stake in ITC can release a lot of cash. US-64 has about 12.5 million shares of ITC and if the Trust manages to sell that stake to parent BAT at Rs 1,500, it can rake in about Rs 18.72 billion for the embattled scheme. But this is still a political issue.

UTI has had large, close-ended equity funds in the past, but their redemptions did not seriously impact the market. That's because when the going was good, the Trust could engage in inter-schemes transfers to avoid the impact cost of selling in the secondary market.

But with none of the funds of UTI really scooping up money, this option is ruled out.

The fund can avoid selling stocks in the market only if redemptions are funded by bank borrowings or budgetary support, in lieu of bonds of US-64 to the lender.

Otherwise, we can be rest assured that the market is going nowhere in the next eight months.

Powered by

ALSO READ:
The UTI Crisis
More Specials
More Money Headlines