The beleaguered U T I may find a ray of hope and that too quite bright hope with the news that the public sector banks are devising a scheme to give a line of credit of Rs 4,000 crore to the Unit Trust of India (UTI) to enable it to meet the impending redemption pressure of US-64 units.The scheme is being devised in consultation with the Reserve Bank of India. In addition to this, Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) have also agreed to buy securities worth Rs 1,000 crore in off-market deals and the trust has pledged its holdings of government securities of over Rs 3,000 crore to raise Rs 2,350 crore, the contributing banks are State Bank of India (Rs 1,500 crore), Bank of Baroda (Rs 300 crore), Union Bank of India (Rs 300 crore) and Central Bank of India (Rs 250 crore).

The rate of interest on the loans for the first six-month period will be 10 per cent. If the loan is not repaid in this period and the same is required to be rolled over, the rate of interest will be revised to 10.50 per cent, the US-64 scheme has around Rs 600 crore cash after paying the dividend of Rs 1,200 crore in its accounts.

According to one estimate, if all the investors utilize the 3000 units' redemption limit that is allowed in the new scheme of opening up the freeze on repurchase, the total liability is likely to be to the tune of Rs 6,000 crore and therefore, the Trust has kept ready a second line of financing scheme to meet the eventuality of a run-like situation on US-64.

The Trust has got assurances from LIC and GIC to buy US-64 holdings in shares worth Rs 1,000 crore in an off-market deal. It is being feared that if US-64's holdings worth Rs 1,000 crore are sold in the bourses directly, it would adversely affect the stock market sentiment, which is already at a low ebb. But LIC and GIC are not ready to buy B-group shares. Because of this, the total fund that UTI can arrange through this kind of deal is limited to Rs 1,000 crore, the main stocks that would be offloaded to LIC and GIC are Reliance Industries, Reliance Petroleum, ITC, Hindustan Lever and Infosys Technologies.

However, if the situation warrants even more than Rs 4,000 crore of funds, it is learnt, the Trust has readied itself with another Rs 2,000 crore line of credit against shares from banks. But, for this, RBI's clearance will be required as banks are not supposed to lend more than Rs 20 lakh against shares. RBI is expected to give such clearances within a couple of days, however, for the loan against shares, the margin will be kept at 40 per cent.

That means against shares of market value of Rs 100, a loan of Rs 60 will be sanctioned. In the current situation, the value of collateral is always marked to market and if value of shares given as collateral falls below a certain level, the banks are supposed to push the sell button if the borrower is not able to replenish it either with fresh collateral or with cash and in this case the source said, banks are awaiting RBI's direction.

U T I – the real story is something else

The real story of the downhill of U T I is something more as they say, with plunging stock market indices, huge redemptions by investors and questionable investments in certain stocks including those in the New Economy sector and all of this has brought the country’s largest mutual fund to its knees and literally gasping for breath. Of the 51 UTI schemes, whose financial details were announced on Tuesday, 35 schemes have logged in a cumulative negative reserve of a staggering Rs 5,186.41 crore.

While the Children’s Gift Growth Fund 1986 alone accounted for a massive Rs 1,654 of the total negative reserve, the MIP 2000 follows with a comparatively conservative Rs 336 crore. Of the 35 schemes, 24 have negative reserves of more than Rs 50 crore; the rest have lower negative reserves and a negative reserve denotes a decrease in unit capital of a particular scheme, which translates into a net asset value ruling below the scheme’s par value of Rs 10.

In good times, schemes maintain a positive reserve as any premium over the face value of Rs 10 goes into the reserves. For example, in the case of UTI’s flagship scheme Unit Scheme 64, if the sale price is fixed at Rs 13, then Rs 10 is added to the unit capital and Rs 3 goes into the reserves. In a falling market, however, the same reserves are eroded which leads to an eventual drop in the NAV and nearly all the assured return schemes, especially those launched since in 1997, are suffering from negative reserves.

Market analysts had been warning UTI against the risks associated with assured return schemes such as the Monthly Income Plan series. Schemes launched in 1996-1997 have an added problem of sustaining high interest rate payouts. However, neither UTI, nor the government took note of such criticism then. The huge negative reserve of Rs 2,366 crore in the MIP series alone is now threatening to snowball into a new controversy.

UTI’s Development Reserve Fund, which is supposed to meet any shortfall between the returns promised and the earnings of particular schemes, has a corpus of around Rs 1,200 crore. This, if seen against the negative reserves of Rs 2,366 crore in the MIP series, will naturally drastically fall short of meeting the promises made to the retail investors and UTI, of course, has made the promise that it would be redeeming the MIP series at least at its par value of Rs 10.

If the stock market undergoes a drastic recovery, UTI will be able to keep its promise. Otherwise, the PSU banks and financial institutions, if not the government itself, should be getting ready for yet another bail-out effort and if you thought UTI’s problems ended with having a negative reserve of Rs 5,186.41 crore, then think again.

The UTI during the six months ended June 30, 2001, has made a huge provision of Rs 2,692.37 crore for doubtful income or debt investments and in layman's terms; the cumulative sum represents UTI's provisions against non-performing assets (NPAs) for the first six months of calendar 2001.

This means that UTI has actually suffered a notional loss of Rs 2,692.37 crore, in its investments in debt instruments, the figure, if added to UTI's estimated losses of Rs 500 crore in the stock markets during the last few months, would be mind-boggling.

UTI's flagship scheme Unit Scheme 64 alone contributed to the tune of Rs 813 crore to this total. Close on heels was ULIP with Rs 464 crore, CGGF 86 with Rs 390 crore and CRTS with Rs 104.16 crore and of the 51 UTI schemes, 47 schemes provided for less than Rs 100 crore, eight more than Rs 50 crore, while 21 provided Rs 10.5 crore or less as provisions.

The running saga of U T I is really a curious one and one which seems to be bringing up some new revelations every day or the other, and GOD alone knows as to what the hell is going out in the largest mutual fund in the country. Meanwhile, the harried investors can only keep their fingers crossed and hope for the best and also prepare for the worst too.