NEW DELHI/MUMBAI, MAR 25: The US-64 scheme of the Unit Trust of India is caught between the devil and the deep sea. It is at the mercy of the investors and the stock markets, thanks to the increased exposure to equities and the widening gap between its net asset value and the sale price. The scheme's bail-out is itself nit into a complex web of inflows from investors, appreciation in the market, especially the Rs 1200 crore invested in IT, pharma and FMCG stocks, the Rs 4800 crore package from the government and the effect of the tax exemptions showered in the budget.The Deepak Parekh Committee has severely criticised the very USP (unique selling proposition) of US-64, which has been its ability to maintain the dividend payout in the range of 20 per cent, irrespective of the market condition. The Trust has two options with regards to the dividend payout for the current fiscal - either maintain the last year's yield from the fund or tune the payout in line with the market condition.Assuming the entrylevel of Rs 14 in July, the yield from US-64 is 12.85 per cent for the lowest tax bracket on a 20 per cent dividend payout. To maintain the same tax-free yield, UTI can safely reduce the dividend payout to 18 per cent. For corporates, a dividend payout of even 16 per cent will translate into a significantly higher tax-free yield of 11.42 per cent against previous year's post-tax return of around 10 per cent. Assuming the December 31 unit capital of Rs 14752 crore, the payout liability works out to Rs 2360 crore at 16 per cent against 2950 crore at 20 per cent. While UTI saves around Rs 600 crore here, the question is can UTI generate an income of Rs 2360 crore?As on December 31, 1998, UTI had generated a surplus of Rs 398 crore but this still leaves a yawning gap of Rs 1962 crore. It is this figure that UTI has to infuse in US-64 either through fresh inflows or appreciation of its portfolio to pay a 16 per cent dividend. With US-64's PSU holdings set to be replaced by government securities worth Rs 4800crore, the fund's equity exposure will fall by approximately 25 per cent (on book value of Rs 19,039 crore). The timing of this interchange of securities is crucial for US-64 - if it takes place at a time when the rally has become broad-based, it will be a golden opportunity lost by UTI to generate substantial gains.On the other hand, assuming that the exchange of securities takes place at a time when the PSU holdings are at a 20 per cent discount to the book value of Rs 4800 crore (Rs 3840 crore), the corpus of UTI will buoy by an additional Rs 1000 crore. Assuming that the transfer takes place in May, the fund will earn an additional interest income of Rs 88 crore for a period of two months with the average coupon on GoI holdings at 11 per cent. The second option is to bring the dividend payout in line with the market conditions or in other words, pay according to the health of the NAV as suggested by the Parekh committee. Well, one may not see a dividend at all if UTI goes to the other extreme oflinking payout to its NAV. This could also result a run on the fund.The third option, though unlikely, is to maintain the dividend yield but bring down the repurchase price for July to prevent short-term investors from walking away with smart gains. This will also give the fund some additional time to recuperate.Meanwhile, between June 1998 and December 1998, the UTI has added more and more equities at the cost of fixed income investments including government securities. It has reposed a greater faith in the stock markets, the virus which ate into US-64's assets.During the six months, following the panic generated by the erosion in the value of US-64, the Trust went to the extent of bringing down its investments in government securities to Rs 272 crore from Rs 1513 crore. Investments in equity increased from Rs 13,647 crore to Rs 15,188 crore. The result: a greater allocation of risk assets in the total portfolio of the scheme. Equities now constitute 80 per cent as on December 31, 1998 against 72per cent in June 1998.
