The Hindu : Fear of withdrawal by US-64 unit holders looms large

Online edition of India's National Newspaper
Monday, Aug 19, 2002

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National

Fear of withdrawal by US-64 unit holders looms large

By Alok Mukherjee

NEW DELHI AUG. 18. The Group of Ministers (GoM), grappling with the future of the UTI, is now confronted with the possibility of the trust offloading massive equity holdings in the market by May next to meet the redemption requirements, which in turn would have serious consequences on the stock markets and the corporate sector.

The Ministers and officials dealing with the restructuring of the UTI are apprehensive that there could be a virtual exit of all unit holders from US-64 by May next when the Government guarantee of 10 paise additional repurchase price every month runs out. Official sources said that most unit holders were waiting for May 2003 — when the US-64 unit would fetch Rs. 12 on a face value of Rs. 10 — to exit the scheme, which may die a natural death post-May next year. In that case, UTI would have to go in for large-scale sale of securities to meet the redemption requirement and the US-64 scheme.

The problem in meeting the redemption requirement was compounded by the fact that the unit capital of the flagship scheme was about Rs. 12,447 crores till June end while the scheme's assets at market value as on June 30, 2002 were only Rs. 8,029 crores. Besides, UTI has estimated that the shortfall due to the difference between the assured repurchase price and the Net Asset Value from April 2002 through May 2003 would be Rs. 5,522 crores, based on the assumptions that the NAV does not change, the pattern of redemptions remain like in the previous year and all existing shareholders exit on May 31 next year. The UTI request for an upfront assistance of the amount has been rejected by the Government.

On the monetary side, therefore, the calculation in the Finance Ministry is that the liability devolving up on the Government would be approximately Rs. 1,000 crores during this year and approximately Rs. 4,500 crores in the early part of 2003-04 (that is, April and May next year). For this year, the Government has already provided Rs. 500 crores to UTI for meeting the shortfall in redemptions and, it is now clear, that another Rs. 500 crores would have to be provided later in the year.

Apart from the resources constraint, the GoM is also concerned about the likely fallout of the possible exit by most unit holders next May.

In that case, massive offloading of shares by UTI — which holds more than 10 per cent of the equity capital in 181 companies — could bring down the stock markets very heavily.

And, with large chunks of their equity up for sale, corporate India could feel the tremors as their shareholding patterns could change significantly.

There are already fears of corporate takeovers by rival overseas companies or domestic competitors acquiring more equity stake in Indian companies and these could well become a reality if UTI were to go in for large-scale selling.

Finally, large-scale offloading in a depressed market may result in further losses to the UTI.

In these circumstances, one of the possibilities that the GoM is looking at is to somehow keep the unit holders attracted to the US-64 scheme, possibly through some tax breaks.

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