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`Take stock of the market en route to US-64 bail-out'

R.Y. Narayanan

COIMBATORE, July 7

THE success of the decision of the top brass of the UTI to formulate a scheme to provide an exit route to small investors, hit by the move to freeze the sale and repurchase of units under US-64, hinges on a host of factors, according to market analysts.

While the details of the scheme are yet to be firmed up, what is clear is that the biggest institutional investor in the country will have to display extreme sagacity to tide over the crisis without making the stock markets any more jittery.

Another view being articulated is that the Centre should not view the UTI in isolation as it is not UTI alone but the entire capital market which is in disarray ever since an investor-friendly Union Budget was presented four months ago.

It is not a bail-out plan for the UTI which is the need of the hour, but a string of measures to prop up the capital market as a whole, according to a senior investment expert. He also wants the Government to go in for an in-depth enquiry into the causes for the market crash in the past few months.

Apparently, from published quotes of senior UTI executives, it is clear that there is no plan as yet to open the US-64 scheme for sale. In such a scenario, a facility to leverage the outflow with inflow to the extent possible is being blocked, sources to ld Business Line.

The other major option available to UTI to raise the necessary resources to meet the redemption demand is to sell the shares under its US-64 scheme. But this is fraught with danger because UTI may have to book losses to raise funds from a depressed marke t in respect of a large number of its holdings since already there is a view in the market that the assets held under the scheme are in the negative territory.

But a more important factor for consideration is that any widespread selling pressure from the UTI may bring down the market further, thus eroding the value of securities held not only by the UTI but also other institutions and retail investors.

While the US-64 scheme also has a strong debt portfolio, which it could profitably offload to PSU banks to infuse cash into the system to meet redemption needs, it is the securities portfolio which is its advantage.

It is said that out of the total corpus of about Rs 12,000 crore under the US-64 scheme, equity accounted for two-third of the value while debt constituted the balance. UTI will have to adopt a judicious mix of sale of equity and debt to raise funds and ensure that its investment portfolio is not skewed.

A host of blue-chip shares had been picked up at far lower value than their current market price and UTI may not rush to encash them in a depressed and volatile market. This is because the value of these scrips will go up substantially once the market re bounds.

So what will be UTI's strategy? Will it be a mix of sale of securities, a portion of debt and even market borrowing to meet the redemption pressure? Moreover, the final decision on who will be allowed to sell back the US-64 units to UTI and the quantit y one would be allowed to offload will also have a crucial bearing on UTI's strategy, sources said.

According to, Mr K. Annamalai, former President of Coimbatore Stock Exchange, the Government should take long-term measures like creation of a market stabilisation mechanism or fund to prop up the capital market as a whole rather than tinkering with UTI.

He said the NAV of the US-64 units was around Rs 8 whereas the sale/repurchase price was, before the suspension, around Rs 14, which meant a premium of Rs 6 per unit over its NAV. This was a luxury which UTI could not afford indefinitely and trading at a price closer to the NAV was a far wiser alternative.

Mr Annamalai said it was during the tenure of Mr P. S. Subramanyam, who quit as UTI Chief a few days ago, that the weightage of equity and debt were restructured with debt getting a higher allocation of 40 per cent and equity 60 per cent.

Earlier, the ratio of debt and equity in the US-64 scheme was 30:70. The lower exposure in equity helped in maintaining some balance. If to meet redemption needs the debt was offloaded, the weightage of equity would shoot up and in any further market dow nturn, the NAV would nosedive.

Mr Annamalai said there was a need to allow UTI to take independent investment decisions. The investment behemoth should not be advised by the Government to provide bailout packages for others, he said.