US-64: Contrarian views should count

By C.R.L. Narasimhan

The crisis at the Unit Trust of India, the country's biggest and most influential investment institution, could have been anticipated by the Government as well as its other stakeholders. The Trust and especially its flagship scheme - the US-64 - landed in a mess because of the inability to judge the stock markets correctly. That bland explanation may not wash especially with the huge number of investors in the scheme. But to a large extent, this is true. In that sense, the country's largest mutual fund and its largest scheme (accounting for a fourth of the Rs. 60,000 crores managed by UTI) are in good company.

Every mutual fund in the country has fared disastrously in the wake of the technology boom and bust cycle in the stock market. It can even be argued that the UTI has fared better than most other mutual funds. Except that it is much, much bigger. And since the troubles in the US-64 scheme became public two and a half years ago the issue became sensitive. After all, in 1999 the Government organised a Rs. 3,300 crore package, while accepting the Deepak Parekh Committee's recommendations.

Analysts point out that the latest travails of US-64 are due to the Trust's inability to implement the remaining points in the committee's agenda. More than two years ago, the report, while diagnosing many of the fairly identifiable ills of the US-64, had suggested a few strong measures. Of the scheme's faults the committee had listed the following: that it announces the sale and purchase prices not in alignment with its net asset value (NAV); it has a preponderance of equity over debt in its portfolio; that its funds management strategy is not up to the mark and that there is no transparency. The committee therefore recommended a move towards NAV based pricing, a shift towards debt funds, to declare dividends commensurate with the earnings and to undertake strategic sales of its vast equity portfolio.

Popular but facile

One popular view is that UTI would not have landed itself in such a mess if only it had pushed through with the restructuring of the US-64 on the lines suggested. The Trust for reasons still not disclosed had not attempted the transformation over at least the past two years.

Beyond doubt that will be uppermost in the long charge list that will be served on the UTI management including its outgoing Chairman, Mr. P. S. Subramanyam.

However, for all its appeal in providing ammunition to nail the UTI, this approach is too simplistic.

For one, restructuring especially on the lines suggested will be a painful exercise no matter when it is undertaken.

Admittedly at certain times - as when the ICE stocks inflated the portfolio valuation - there could have been less restructuring pain. Cash the equities at the high price, invest in first grade fixed instruments and the severity of the problem would be reduced, if not altogether eliminated. So goes the argument. Why did not the UTI heed such elementary advice?

The problem is we all derive wisdom only from hindsight. Which expert predicted the all too sudden demise of the tech stock fad? Moreover, which fund manager would exit from fancied stocks especially when he along with everyone else believed that he was riding the crest? Supposing the US-64's fund managers had pulled out of certain stocks at a particular price level only to see them go up immediately and over the next few days, would there have not been allegations of short-changing its investors?

There could be many more such questions, all hypothetical but exactly like the charges being levelled against the Trust. It is highly probable that the UTI committed blunders but such individual acts do not necessarily prove that the restructuring was delayed.

More of debt, but...

Also, since the Parekh panel had suggested that the US-64's portfolio should be reworked to accommodate more of debt, it is be explained why UTI was not able to achieve it over at least the past two years?. For, that is a welcome though obvious recommendation.

When conceived in the Sixties, the US-64 was meant to be an income scheme, promising a steady and safe return to its numerous unit holders, whose savings it channelled into the stock market. The promise of a regular return ought to have meant that the bulk of its corpus be kept in fixed income securities.

Indeed, the monthly income schemes made popular by UTI and subsequently copied by others do manage to invest substantially in debt instruments. However, most of the latter are puny in comparison to the US-64. There has been a dearth of quality debt paper to this day, certainly to the extent needed by a restructuring US-64.

The last point has repeatedly been made by Mr. P. S. Subramanyam to The Hindu, among others. Here again, there will be a lot of explaining to do but the Trust ought to be on surer ground.

A shift to NAV based pricing of units has been another welcome and again obvious recommendation. Though it can never be attempted as part of a shock therapy. The US-64's problem here is one of legacy. Gradualism is in order and was in fact followed. Until the latest crisis took over.

Ironical as it may sound now, last Monday's announcement by the Trust - suspending liquidity for six months and so on - was in fact a loud proclamation to restructure. Except that it was issued under duress. It has made UTI unpopular and its Chairman's seat, nobody would want. The six months time which the US-64 sought can be viewed as a small investor friendly measure as it does block the exit of large corporate investors. The latter precipitated the crisis. In fiscal 2001 redemptions of Rs. 5,962 crores exceeded fresh sales of units which were Rs. 2,661 crores.

In April-May this year corporates precipitated the crisis by withdrawing in bulk. Their withdrawals during those two months formed part of a large Rs. 4,100 crore outflow. A rela-ted message here is that given the opaque, non-NVA based working of the US-64, large corporates benefit at the expense of the small man. Another strong case for investor education.

There could be a few points to explain as to why the US-64 was not reorganised earlier as contemplated.

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