UTI developments dampen market sentiment

By Oommen A. Ninan

MUMBAI, JULY 8. The stock markets in the country are facing one setback after another. While the earlier excuse was of political uncertainty, the next was global recession, IT meltdown and a slowdown in key sectors. The latest has been the breach of trust committed by the Unit Trust of India (UTI).

The benchmark Bombay Stock Exchange 30-share sensitive index (Sensex) dipped by 151 points to 3305.78 during the week ended July 6 from 3456.78 in the previous week. On the National Stock Exchange (NSE), the S&P CNX Nifty index lost 45.35 points at 1065.80 against 1111.15. While domestic mutual funds were selective sellers, foreign institutional investors have remained selective buyers at lower levels.

In the first week after the introduction of rolling settlement, stock prices came under pressure in line with expectations by market participants. Expectations of a heavy fall in the volume were belied as volumes were better. ``With positions to be squared by the end of the day, volatility in stock prices has been high especially towards the end of the session as positions are squared off,'' felt Mr. Imran Contractor, Research Head of Milan Mahendra Securities. According to him, on days when delivery-based selling took place, stock prices had plummeted towards the end of the day.

The volumes in the options market have been negligible with wide spreads between bid and offer prices. However, buyers for calls on most of the stocks, especially in software sector, were aplenty even at higher premiums. Said Mr. Contractor, ``This indicates the speculative urge of the bulls to be ready to buy a call (right to buy) a stock at a specified exorbitant implicit interest costs ignoring volatility.''

Cement companies have again decided to recoup the fall in prices due to the onset of monsoon, in the coming days. Mr. Contractor said with the golden quadrilateral project going on there are hopes of firm demand for cement. The firmer prices with slight improvement in offtake of cement in the June quarter will lead to most of these companies reporting sharp improvement in their performances. The wide dispersal of monsoon has raised hopes of a pick up in the agricultural sector. It is expected that the pick up in agricultural sector would translate into improvement in the economy in the coming days.

It was an eventful week in the history of the capital market with the UTI suspending sale and purchase of its flagship scheme US- 64. However, it declared a dividend of 10 per cent, which too was the lowest. These developments again affected investor confidence. While retail investors have felt a breach of trust, many corporates wisely got out of this scheme well in time.

The Government has to look into all the issues involved in US-64. From the very beginning of this scheme, UTI has adopted a faulty approach.

As any other Government organisation UTI also functioned in a covert manner which gave a high-handedness for all the officials from the level of chairman to fund managers over the years. Instead of professional investment mechanism, they adopted and favoured some companies and continued to invest in those companies without any shuffling. This is evident from the fact that most of the top portfolios of the scheme were almost unchanged for a long time. The point is that UTI needs market savvy professionals who understand the market.

Governments always find a scapegoat whenever crisis erupts. Like the recent Tamil Nadu political debacle, the Government found an excuse in Mr. P. S. Subramanyam by asking him to resign from the post of Chairman of UTI, instead of looking into the US-64 issue in totality. Mr. Subramanyam has a better grasp of the market. All that has happened now with US-64 is not something that occurred in the last one year, but it is the culmination of events and policy which was enacted and adopted over a period, in fact, from the beginning of the launch of this scheme. The total corpus of US-64 dipped to a low of Rs. 12,772 crores at the end of June 30, 2001 from Rs. 15,505 crores in the beginning of the accounting year.

The Government gave Rs. 3,000 crores for UTI as a bail-out package in 1999 when Mr. Subramanyam took over as chairman. This should have been used for making the scheme net asset value (NAV) based. Experts feel that the capital market regulator and the Government were responsible for the rout of this popular scheme.

The capital market needs an overhauling. These days, public issues are launched without any public participation as corporates are opting for private placement. The basic purpose of the stock market is to enable and create a suitable environment whereby investors can be attracted to market and raise maximum domestic resources. But sadly, that is not happening here now and that is the plight of Indian capital market today. Once again, the retail, lay investors are at the receiving end.

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