UTI suspends US-64 sale, repurchase
New Delhi— The Unit Trust of India management, has for the first time in the 36 year history of the Trust announced the suspension of sales and repurchases of its flagship scheme US-64 till December 31, 2001.
On the dividend front, the US-64 unit holders would be paid a dividend of 10 per cent, and the dividend will be from the income earned and not from the reserves. This is against last year’s dividend of 13.75 percent.
UTI officials say that the suspension of sales and repurchase became absolutely necessary after the Trust experienced an unprecedented redemption pressure in US-64 during May. The total redemptions during April-May were a staggering Rs 4,114 crore, which raised fears that the reserves under the scheme "might turn negative."
The redemptions in May alone brought down the NAV of US-64 by 1 per cent, said a top UTI official.
UTI chairman P S Subramanyam when announcing the decision said the move was aimed at achieving the twin objectives of restructuring the investment portfolio of the scheme in the face of volatile stock market, besides hoping for the market to become stable so that the equity investments of US 64 fetches higher returns. He said the temporary suspension of the scheme for six months would, however, not affect the liquidity of the scheme as it was listed in the wholesale market.
He, however, denied that the US-64 suspension move would in any way send negative signals to the bourses and instead would send good signals to the stock market.
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Banks may be hit
Mumbai--With US-64 sales and repurchase being suspended for a period of up to six months and UTI deciding to make the scheme NAV based, banks and NBFCs who were giving loans against the security of these units may be in big trouble, if borrowers default on loans.
In this instance UTI’s 60 per cent owned associate — UTI Bank may be the worst affected. The bank not only extends loans against units with a 40 per cent margin, but does so at a slightly lower rate than that charged for loans against shares and in fact UTI Bank only extends loans against units of US-64 as a policy and not against that of any other MF units.
As on May 31, ‘01, the bank had outstanding loans against US-64 units of Rs 54.13 crore.
The developments related to US 64 have shaken the confidence of other major banks also.
HDFC Bank is convening a meeting of its investment committee to decide whether to accept US-64 units as collateral. Though banks have been accepting US-64 units as collateral, few have advanced funds to investors to buy units of this scheme.
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Retail investors to be hit
Mumbai--The ban on the sale and repurchase of US 64 scheme for six months will hurt thousands of retail investors who have ploughed in their life's savings in the scheme.
Existing investors in US-64 will have the option to sell their units in the stockmarket, since it is listed on the National Stock Exchange.
But market sources said that US-64 units, despite being listed on the bourses, hardly received any substantial investor response and there is a lot of uncertainty on the price commanded by each unit on the stockmarkets. As of date, the price of US-64 is decided on the basis of the repurchase price offered by UTI. The current repurchase price is hovering around Rs 14.
To make matters worse, since UTI has announced a 10 per cent dividend on US-64, the effective yield on investments of one year works out to about 8 per cent, which is lower than the ruling yields at the bond market.
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UTI to sell off strategic holdings
New Delhi—Faced with a barrage of criticism on the disappointing performance of US-64 and the ban on the sale and repurchase of the scheme he remains unperturbed and feels that the six-month period would help consolidate and help provide the much-needed stability to the scheme that holds almost 26 per cent of the fund’s total corpus.
But, UTI now would do something it has never done before. It plans to aggressively sell its strategic holdings in large corporations to get the best valuations from either promoters or whoever else is interested.
He said the sale of these holdings was part of a broader strategy to revive the US-64 scheme and move it towards a NAV-linked structure.
Until now, FIs have been largely passive investors and with UTI wanting to dispose of large holdings for price discovery, corporate raiders might be looking forward to some fun.
He said the suspension move was restricted to US-64 and would not be extended to other schemes. He added that the portfolio of US-64 would also go in for a sector restructuring with the FI getting out of a few sectors and becoming more active in some others.
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Markets down on launch of stock options
Mumbai-- Although response to the newly launched complex option products on the National Stock Exchange (NSE) today was low, market analysts said it would gain popularity over time as it also offers enough scope for day-trading.
The BSE is yet to start option trading in stocks.
The sentiment was marred by the introduction of compulsory rolling settlements in 400 odd actively traded stocks.
UTI’s announcement of the ban on sale and repurchase of US-64 units for six months and the cut in US-64 dividends to 10 per cent, coming after the close of trading sessions, shocked the market fraternity.
Mirroring the subdued trends, the 30-stock BSE sensitive index declined from an intra-day high of 3,487 to close at 3,426, netting a loss of 31 points.
The total turnover on Bombay stock exchanges was at a four-year low Rs 505 crore, breaking the earlier low of Rs 512 crore in May 1997. The turnover on the NSE was Rs 894 crore lowest since February 23, 1998.
While, the turnover in options trading in 31 stocks stocks was approximately Rs 10 crore with transactions in over 900 contracts.
It is one tenth of aggregate turnover of over Rs 5,000 crore early May before announcement of ban on badla trading.
Most traders opted to stay away from making commitments in options trading in stocks for lack of proper understanding of the new products.
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