Trustworthy UTI

When UTI slashed the interest rate on US-64, from 20 to 13.5 per cent, it upset me a great deal. It is true that this cut is justifiable ...

When UTI slashed the interest rate on US-64, from 20 to 13.5 per cent, it upset me a great deal. It is true that this cut is justifiable on several counts: First, the dividend is now tax-free; second, the overall interest rates in the market have come down significantly; third, the Deepak Parekh Committee DPC has recommended that the distribution of the dividend should be comparable with that of other instruments in the market; fourth, UTI was hit hard by the run on its scheme.

One can take solace from the fact that the dividend rate works out at 10 per cent, with a base of the sale price of Rs 13.50. Somewhere in September last year, it was discovered that the UTI balance sheet showed negative reserves of Rs 1,097 crore. No one bothered about the far-reaching effects this would have on the economy and on the small investors.

P S Subramanyam took over the reins of UTI just before all hell broke loose. Any lesser mortal would have succumbed to the pressure and brought down the sale price on a par withthe net asset value NAV. Such an action would have spelt disaster for the nation. Subramanyam believed that the crisis was an outcome of the market having hit the bottom because of coalescence of many factors detrimental to the market sentiments. He was sure that this was a passing phase. Given time, the market would go up and then the NAV would meet US-64 sale price. As much as Rs 7,513 crore were redeemed and this further ate into the net asset value.

An additional factor hit the scheme hard. UTI initiated the process and when the market went up, it lost the chance of benefitting therefrom as much as it would have had otherwise. All this has resulted in a detrimental effect on the economy. Induced by irrational panic, investors withdrew money from US-64 and consequently US-64 withdrew money from the share market.

All said and done, UTI has wrested success from the forest of thorns. The negative reserves of Rs 1,098 crore have been totally wiped out. The scheme earned Rs 2,200 crore, sufficient to paya dividend of 16.2 per cent. However, in line with one of the recommendations of DPC, UTI has adopted once bitten twice shy8217; policy and declared a modest dividend of 13.5 per cent. UTI has weathered the storm efficaciously, in spite of umpteen predicaments. It has proven managerial capabilities and given a little more time I strongly feel that the NAV will go above its sale price.

Had UTI not been as transparent as it was and had the panoply of fixers and manipulators not pressed the panic buttons resulting in the stampede on US-64 scheme, there was no need of any government rescue package.

Though UTI has played a mature and responsible role throughout this episode, it is possible that the heavy slashing of the dividend may induce some of the investors to withdraw their funds. However, it is a fact that every rupee withdrawn hurts the loyal investors.

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I suggest that UTI should protect their investors by increasing the spread between the sale and repurchase to Rs 1.30 as was prevalent in November 1994to May 1995. No one, except yours sincerely, made any complaint then. This is possible because US-64 is still not under the surveillance of SEBI. Okay! How about increasing it to 65 paise as per SEBI guidelines?

The author is an investment consultant