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Suresh Krishnamurthy

IT WAS clear to investors, even from early April 2001, that the repurchase price of US-64 after dividend would be much lower than the repurchase price before dividend. Therefore, it was logical to expect increased redemptions in April and May 2001. But what really happened?

Redemptions in those two months by individual and companies were equally high. However, it is the higher redemptions by companies that is significant. Informed fund managers at many of India's bluechips and banks had remained invested in US-64 despite the justification for exiting from US-64. When these entities rushed to exit in April-May, they raised a few eyebrows.

Interestingly, banks — some state-run too — were also among those that redeemed heavily during those two months. Interestingly, US-64 borrowed from some of these banks to meet the redemption pressure. So, banks that lent to US-64 may have used the information to redeem their investments. If this is so, the banks may be guilty of using material non-public information. Prima facie, a case exists and the onus should be on the banks concerned to prove that their redemptions were a case of informed, and not insider, trading. Unfortunately, not enough light has been thrown on what happened in those two months.

Redemptions over that period are important because much of the deterioration in the US-64 NAV may have happened then. According to the UTI redemptions during April - May 2001 were around Rs 4,100 crore.

So, if the redemptions at Rs 13.50 per unit were made when the NAV was below Rs 10, the impact on the reserves and, consequently, the NAV, would have been adverse. For example, if the NAV then was Rs 9, redemptions amounting to Rs 4,100 crore would have wiped out more than Rs 1,200 crore from the reserves. If the NAV was lower than Rs 9, the impact would have been even worse.

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