Mastershare likely to go open-end

New Delhi, March 15: The Unit Trust of India is considering the option of making Mastershare open-end. Mastershare is the oldest equity f...

New Delhi, March 15: The Unit Trust of India is considering the option of making Mastershare open-end. Mastershare is the oldest equity fund in the country with an enviable dividend-paying track record. According to sources, the Trust is considering filing a revised offer document with the Securities and Exchange Board of India to make the fund open-end. When contacted, UTI chairman P S Subramanyam said that a constant review of Mastershare was on but no decision had been taken to make the fund open-end as yet.

Analysts feel that Mastershare makes a perfect case for going open-end after the budget for fiscal 2000 made dividend from open-end equity funds tax-free. 8220;That dividend has been made tax-free for three years gives all-the-more reason why Mastershare be made open-end,8221; said a sector observer.

Mastershare has generated a steady stream of annual dividend and has also given three bonuses and two rights. The fund has given an annualised return of 25 per cent since inception in 1986 and is due forredemption n October, 2003.

As on March 3, the fund had a net asset value of Rs 17.16. Since then, the Sensex has gained over 293 points or over 8 per cent since the March 2 level of 3524. Mastershare units currently trade at Rs 11.60 on the Bombay Stock Exchange or a 32.4 per cent discount to the March 3 NAV. 8220;The discount to NAV makes the fund very attractive and if the fund goes open-end, it will be a windfall for investors. Given that the market has crossed the 3800-level, the NAV would have received a further fillip,8221; said a fund analyst.

If Mastershare remains a closed-end fund, it will have to pay a dividend tax of Rs 14.6 crore, assuming that the fund maintains the 16 per cent payout on the current unit capital of Rs 912.72 crore. The budget has levied a dividend tax on all funds, except US-64 and open-end equity funds.

8220;If Mastershare is made open-end, corporates and retail investors alike will find the scheme very attractive since the dividend income has been made tax-free,8221; said ananalyst, adding that the fund was likely to attract bulk investments from corporates.

However, two factors may delay the fund from going open-end. One, UTI has seen a redemption of Rs 177 crore in three months after Masterplus was made open-end on October 1, 1998. The fund had a unit capital of Rs 909 crore on December 31, 1997 which dropped to Rs 732 crore on December 31, 1998.

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Masterplus has not paid any dividend since inception. 8220;There was intense speculation in Masterplus before it went open-end. A bulk of this redemption seems to be from investors who invested for short-term gains. Redemptions are now likely to slacken as in the case of Mastergain,8221; said an analyst.

Another factor that may go against making Mastershare open-end is dividend stripping by corporates as in the case of US-64. 8220;Corporates will invest in bulk, take dividend and then book a capital loss which can be used to adjust against future income,8221; said a fund manager.

Consider this. A corporate puts in Rs 1 crore at thecurrent NAV of Rs 17.16 and gets Rs 16 lakh 16 per cent on its investment. Now, with the dividend-adjusted NAV of Rs 15.56, the corporate can redeem units and show a capital loss even as it has earned a tax-free dividend. 8220;This loophole can also be plugged to a great extent if UTI puts a hefty exit load in Mastershare once it goes open-end,8221; said an industry observer.