US-64: flawed perceptions of age-old problems

By C. R. L. Narasimhan

The Unit Scheme 64 crisis, bad as it is, is being aggravated by the extraordinarily inept handling at all levels. The crisis itself - fiasco is now the more popular word - set in soon after the July 2 announcement to freeze both sale and repurchase of units under US-64 and slash the dividend to 10 per cent. Panic soon set in and till date is not by any means confined to the small investor class, which ironically defies a clear cut definition.

The Finance Minister says he was unaware of the impending announcement (to freeze repurchase), has announced an enquiry and appointed a panel of outside experts to guide the UTI officials in restoring liquidity.

A public interest litigation has been filed before the Bombay High Court. Among others, it petitions for restoring liquidity (through repurchase) and a considerably higher dividend of 20 per cent for this year. The primary cause for today's panic is the decision to suspend repurchase of the units for a six month period. This means that those who want to exit by selling back the units to UTI can no longer do so.

Repurchase at pre-announced prices has been one of the strong selling points of the US-64 scheme. A steady and relatively high dividend has been another. Strike at them and all investors naturally feel threatened.

The UTI's original intention was that this would be part of a package: the other - operational - ingredients were suspension of sales (as well) and a lower but still acceptable return of 10 per cent. More important, the UTI wanted to use the interregnum to restructure the US-64 scheme, take vital steps such as selling its bulk equity holdings in co-ordination with other GOI investment institutions and in general churn the portfolio mix to more truly reflect the objectives of the scheme.

The above line of action proposed in the July 2 announcement has a lot to commend itself. Provided of course one concedes that the US-64 needed a drastic overhaul. Another related key assumption: the restructuring or drastic overhaul could not be carried out in the ordinary course, when the US-64 buys and sells its units and otherwise maintains at least a facade of normalcy. The reasoning is that once investors get wind of ``the trouble'' they will cause a run, thereby jeopardising the scheme further.

Since past experience tells us that the large investors being more market savvy move out faster than the rest, the UTI's package, drastic and anti-investor as it appears, is really meant to shore up the interests of the smaller rather than the big investors. If the Trust had not announced a freeze, there would have been a repetition of what happened in April-May this year. During those two months alone, repurchases of US-64 units - mostly (according to the allegations going around) by large corporates - amounted to Rs. 4,151 crores with the sales mobilisation for the entire year being just Rs. 2,661 crores. Aggregate repurchases during the year were Rs. 5,962 crores.

Merit in these

The other proposal to sell its large equity holdings in a staggered manner and in coordination with other investment institutions has merit. The size of the 64 corpus is large and therefore its equity investments are considerable. If the Trust were to unload through the market, everyone including the seller will suffer. But offloading its equities is a must for it to restructure.

The US-64 has for long been positioned as a regular income scheme while historically it has invested more in equities. (Quality debt paper has simply not been available). Correcting this mismatch between its objectives and past and present investment patterns is one of the key tasks of the restructuring exercise. Though it sounds simple, it is extremely complicated to handle and even the very idea of airing such an idea in public can land everyone and the scheme in a mess as past experience shows.

If the UTI's proposals had something in their favour, why have they been so thoroughly disowned by everyone? The Finance Minister's statement that he was kept in the dark (about the freeze in units sales and repurchase) strikes a discordant note. Not so much because it is improbable but because he ought to have made such a statement only if he had some better options.

One need not debate the issue as to whether it is possible at all for any public financial institution to implement major unpalatable decisions without at least having the tacit concurrence of the Government. But one can certainly ask the question: can any one be so ignorant of the financial health of the UTI and of the strong case for overhauling it to believe that the US-64 could be run as usual with a few minor adjustments in its sale and repurchase prices and in its dividend?

The crux of the issue is that the US-64 is being viewed as a problem that occurred overnight, after the July 2 announcement. In fact for most of its 37 years the scheme was flawed, yet managed to carry on with a semblance of order. If accountability issues have to be addressed the inquiry ought to cover a really long timeframe. But to the Government and to the UTI's present management those are not issues for now. Unfortunately, almost by reflex action, blame is being laid first before understanding the issues.

The season of identifying scams has begun.The fact that large companies cashed in their unit holdings in April-May is made much of and is seen in a sinister light. Insider trading allegations abound. However, no one cares to know that large corporates have always been big traders of the units. They probably do not need such insider-trading causing information even if that exists. Two, their operations being more sophisticated, will naturally factor in their reading of the US-64. They might have re-entered at a lower price if the US-64 was still on its feet. Three, when they exited (as they have been doing all these years) they were not really abandoning a sinking ship. In fact, the current panic has made many conjure a worst case scenario of the US-64 going into liquidation but that is far from truth. Finally, the US-64 fiasco ought to be seen as the Government's communication strategy going spectacularly wrong.

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