The Unit Trust of India has once again shied away from biting the bullet. The Trust's decision to "temporarily" suspend sale and repurchase in Unit Scheme '64 has come as a big blow to the confidence of crores of investors. With liquidity gone, the fund behemoth is likely to invite the wrath of unitholders. Already, the sharp cut in dividend from 13.75 per cent (Rs 1.375 per unit) to only Rs 10% (Re 1) is unlikely to go down well with the investing community. While the Trust has ostensibly disbanded sale and redemption till end of the current calendar to restructure its sinking flagship, it is clear that UTI bosses are pinning hopes on a market revival. This is expected to shore up the NAV and ensure a smooth transition to NAV-based transactions in 2002. UTI was also rattled by the massive redemption of over Rs 4,000 crore in April-May this year and did not want a repeat in July due to a lower dividend.
The Fund Rendered Illiquid
The suspension effectively means that the fund has been rendered illiquid and investors have no option but to remain stranded till January 2002. While US-64 is listed on the wholesale debt segment of the National Stock Exchange, OTCEI and Bangalore, Delhi & Ahmedabad bourses, it is hardly traded. Further, there will be no underlying value now to trade the units. While the NAV of the fund is anyway not known; the sales and repurchase prices will also not be disclosed. Thus, the listed price for US-64 units is likely to attract stray quotes and the pricing will go haywire. When quizzed, UTI chairman P S Subramanyam said, "Let us hope the price is determined by demand and supply and does not go haywire.'' He added that that the Trust was still calculating the reserve figures. "They might turn negative for the past year.'' It may be recalled that reserves for the fund had turned negative in 1997-98 to the tune of Rs 1098 crore.
Shrinking Market Share
Apart from the loss of an exit option for investors, the suspension of sales in US-64 is likely to hit the mobilisation of UTI in the current financial year (ending June 2002). The Trust is already fighting with its back to the wall and fast losing market share to its aggressive peers. US-64 has traditionally accounted for a large chunk of sales for the 38-year old mutual fund. For instance, the fund contributed 26% or Rs 2661 crore of UTI's gross sales for 2000-01 of Rs 10,143 crore. The other top grosser, monthly income plans have also witnessed a fall in collections after UTI stopped assuring income for the entire tenure of the scheme.
For the fiscal ended June 30, 2001, the repurchase for the monolith was at Rs 5962 crore while the sale was at Rs 2661 crore, thus leading to a net outflow of Rs 3301 crore. The bulk of the redemption took place between April and May when investors pulled out a whopping Rs 4151 crore on fears that the fund would lower repurchase price in July in line with its NAV. For the fiscal, US-64 earned a net income of Rs 1524 crore with the unit capital at Rs 12778 crore. This gives a net income of Rs 1.193 per unit and represents a fall of 52 paise from the per unit income of Rs 1.714 in 1999-2000. Last year, US-64 had earned a profit of Rs 2597 crore on a unit capital of Rs 15,146 crore.
The number crunching is just one part of the story. The suspension has larger ramifications for the biggest mutual fund of the country, as it is likely to besmirch its image. While UTI has so far been a self-proclaimed champion of the retail investors, the suspension has left the same class high and dry. Thus, it will not come as a surprise if UTI is besieged with public interest litigations - there is precedence in the case of Rajlakshmi Unit Plan. Or, there could be a run on US-64 once it opens for redemption next year. After all, it is the TRUST that has been shattered!