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US-64 adds to jitters

Aarati Krishnan

THE announcement by the Unit Scheme 64 that it was suspending all repurchases and fresh sale of units appears to have had exactly the opposite effect on the markets, to that expected by the fund.

The Chairman of the fund took the view that the freeze on redemptions by the behemoth would lift market sentiment by ruling out the possibility of sale of stocks by the fund in the near term.

But the market appears to have taken a longer term view of the situation. Stocks which are among the top holdings in the Unit Scheme 64 portfolio lost considerable value on July 3, the first day of trading after US-64's board meeting.

Reliance Industries, in which US-64 had invested 14 per cent of its assets by December 2000, fell from Rs 357 to Rs 328. ITC, in which US-64 invested around 6 per cent of its portfolio, fell from Rs 772 to Rs 754. Infosys Technologies, in which the fund held 2 per cent, crashed from Rs 3,723 to Rs 3,277.

Stocks which are part of the portfolio but managed to remain relatively steady were Tata Steel, Reliance Petroleum and HDFC.

These and stocks such as Hindustan Lever, Hindalco, ICICI and MTNL which were also part of the portfolio could bear watching over the next few trading sessions.

Given the size of US-64's portfolio (over Rs 10,000 crore), even a 2 per cent investment by the fund can account for a sizeable portion of the floating stock for a particular company.

The fact that the transition to rolling settlement has decimated trading volumes in most stocks may only magnify this problem.

The markets appear to have reasoned that if US-64 is to set its house in order within this six-month period, this would involve active reshuffling of the portfolio.

Thus, though no longer faced with redemption pressure, UTI would continue to be in the markets, selling some of its holdings, in order to cut losses.

Besides, UTI may also have to encash part of its portfolio to meet dividend payouts and any redemption pressure that may surface after the six month embargo.

Meanwhile, with UTI freezing redemptions, corporates with investments in this fund may also find themselves stuck with illiquid units for the time being. All this has served to add to the uncertainties in an already jittery equity market.

The sizeable investments locked into UTI may also hold back retail investments which could have eventually flowed into the equity markets or into other equity funds managed by private sector funds.