COMMENTARY
INTERVIEWS
CHAT
ARCHIVES

The Rediff Business Special/ A N Shanbhag

Stop it! Hail UTI for being transparent

Unit Trust of India's Unit Scheme-64 has been drawing an unprecedented flak from almost all financial dailies. It is important that UTI investors should try to see the true picture and understand what NAV means before getting panicky.

The net asset value of a share (or unit) of any organisation, including that of a mutual fund, is defined as the amount that the organisation would be able to collect by selling all its assets in the market, divided by the number of the issued shares (or units). The assets include all tangible and intangible ones.

Traditionally, the share prices are governed by the demand-supply forces and UTI followed that precept since the concept of NAV followed by other MFs was just non-existent until the late eighties.

What are tangible assets? They have a high correlation with NAV. These comprise the liquid investments in shares, units, bonds, debentures, collateral fixed deposits, loans, etc, as well as immovable assets such as plant, machinery, real estate (self-occupied or otherwise), etc.

Some assets which have no market quotes are valued by using a special technique known as mark-to-market which is related with the differential between the contracted and market interest rates. Consequently, for no fault of it, the fund is mostly forced to assume a lower value, though eventually these investments would give the slated yield at their maturity.

The concept of NAV arises from the legal position of a unit-holder having an equal right in the beneficial ownership of the assets of UTI. Thus, if UTI holds a stake in 1,000 different companies, each unit represents a tiny portion of each of these companies. Thus the unit holder gains a much wider spread than he can ever hope to obtain on his own.

The same unit also represents a tiny portion of each of the office premises owned by UTI all over India from where UTI provides services to the unit-holders. The total book value as reflected in the balance sheet is around Rs 3.67 billion reflecting the cost of acquisition minus the depreciation charged over the years.

Real estate prices have shot through the roof over the years. Even during the current depressed real estate market, the prices continue to rule high in prime financial localities. This depreciation allowed to be charged is merely a book entry and is much higher than the actual depreciation that the property suffers due to the ageing process.

NAV is required to be computed at the market prices of all the assets and surely, this is an important asset in which a unit holder has a share. What is the market value of this asset? Well, considering the fact that these assets have been acquired from as far back as 1964 onwards, the value can be a large multiple of the one shown in the books which ignores the real appreciation and the fictitious depreciation.

In theory, the market value can be ascertained by getting a government-appointed chartered valuer to give the assessed value every month (every day, if the NAV is to be declared on a daily basis!) Will it serve any purpose? No. This is an asset that cannot be, and even if it is possible, will not be sold for obvious reasons.

Moreover, real estate is a solid asset that has no capacity of earning tangible income and therefore, it would be dangerous to treat it on par with the liquid assets.

This is a unique and special problem faced by UTI and no other MF that I know of. This is why the prices of US-64 are fixed on the basis of demand-supply. There is no compelling reason to change the age-old practice and switch over to NAV, which is difficult to ascertain.

So, what is the NAV of US-64? Even God does not know, leave alone UTI Chairman P S Subramanyam. The media has demeaned him for making a factual statement that he is not aware of what the NAV is. Bad! He was trying to be as transparent as possible and instead of appreciating him for it, the panic button was pressed in a hurry.

No one, it appears, is bothered about the impact that this contorted `information' will have on the Indian economy, leave alone the investors switching over to risky avenues like teakwood, goat farms, and other schemes of fly-by-night operators who continue to remain outside the domain of any regulatory authority.

Now let me discuss intangible assets. US-64 also includes intangible assets. The non-quantifiable ones are discussed below.

Goodwill is the capitalised value of presumed excess earning power in future. Thanks to its experience of the last 34 years and consistently excellent performance, UTI enjoys goodwill of investors to such an extent that most of them will not panic in spite of the misconstrued publicity. All the other MFs put together do not enjoy this privilege.

Intellectual property: UTI has concentrated on building an efficient and dedicated management team. Other MFs are also following suit but they do not have the headstart which UTI had. Every member of this team deserves an LIC keyman insurance policy.

Financial clout: This is the most valuable intangible factor. What is the market price? It is well known that when Titanic-sized buy or sell orders come to market, the transactions do not take place at the then existing market price.

This is more so, during the current scenario of high density of mergers and acquisitions. UTI, with its nine per cent holding of market capitalisation, can surely negotiate for dream prices as it has done on some occasions in the past.

Blue chips: All these intangibles are certainly not tradable scrips like those of Infosys with a stupendous market valuation. Possibly, the strength of Infosys is already factored in, in its current market price, but the UTI does hold a slew of premium but currently undervalued stocks such as ONGC, IOC, SBI, Bharat Earth Movers, Shipping Corporation, IDBI, SAIL and a host of other scrips and surely these can be considered as hidden value.

When an investor chooses to hold on to a stock, which, in his opinion is underpriced, its value is embodied in the fact that he can sell it at a more opportune time.

All these values cannot be reflected in quantitative terms as contribution to the NAV.

These days, many front-page headlines proclaim that FIIs are planning to bring in money into Indian markets which are recognised by one and all as heavily underpriced. It would be indeed unfortunate if UTI is forced to sell some of its blue chips which are looking up just because of the unreasonable and unjustifiable panic arising out of diagnostic confusion.

It has to be realised that the original corpus of UTI has not turned negative just because the premium reserves showed a negative balance of Rs 10.98 billion on a particular day. The balance has come down to as low as about Rs 1.5 billion within just three months!

Moreover, it is unlikely that UTI will not earn enough to maintain the dividend to the level of last year. So there would be no need for looking to the development reserve fund.

At the micro level, the NAV of US-64 may be suspect, but at the macro level, surely, the NAV of an institution like UTI is its total contribution to the economic welfare of the country and not the money value for which it will sell.

Should you opt out? Balance sheet represents an instant and still picture of the enterprise as of a particular day. Since the conditions prevalent as of that date affect the picture, it would make financial sense to discount these if these are temporary aberrations. Panic triggered by short-sighted analysis based on this still picture deserves severest censure and condemnation.

One-third of the corpus of UTI is held by corporates who find UTI as the best short-term parking place. The corporates cannot afford to stage a mass exit. In case they do, UTI will be forced to sell its stocks including those of these very corporations and this will result in their market prices, which are already at a low ebb, tumbling down further. Consequently, many industrialists and businessmen have already publicly declared their confidence in the US-64 and their resolve to stay with UTI.

Since huge monetary resources are held by UTI, the performance of the national economy is getting increasingly conditioned by the accomplishment of UTI.

Obviously, UTI top brass sensibly decided to totally ignore this temporary aberration since taking any drastic action such as reducing the dividend paid to unit-holders or reducing the sale/repurchase prices of July 1998, would have been very harsh to the retail investor.

It has confidence in its ability to such an extent that it has raised the sale and repurchase prices for October by 15 paise, bringing the cumulative rise over the period of three months (August to October '98) on its July price at 55 paise. These monthly increases are dividend equalisers. If the dividend for the whole year is slated to be Rs 2, the equaliser for three months of 55 paise is in tune with the slated dividend of Rs 2 for the entire current year.

The message of P S Subramanyam is loud and clear. The show will go on with the same gusto as before. I am surprised to find that instead of appreciating this protective attitude towards his investors, accusing fingers are being pointed at him. There are many who cry foul at the slightest provocation and are on the constant lookout for a peg to hang their criticism on.

US-64 has been a pet subject over the past few years even when its performance was par excellence. For instance, when UTI declared 20 per cent dividend coupled with 1:10 bonus (that is, additional 14 per cent), the doomsayers chose to ignore the bonus and harped on reduced dividend from earlier 26 per cent to 20 per cent.

Appreciate UTI for becoming more transparent than ever, even when they could have chosen a better opportune time to do that.

To sum up, the US-64 stakeholders, retail or otherwise, need not panic and shift over to more risky, less liquid and dubious avenues. Thankfully, UTI has become more transparent than ever and it is striving hard to maintain, if not increase, the benefits to those who have put their trust in the Unit Trust of India.

A N Shanbhag, the well-known tax expert and author of In the Wonderland of Investment, often contributes to these pages.

EARLIER REPORTS:
Dark Diwali looms as UTI crisis deepens
'There is no need for panic'
'US-64 is not a scam. No scam lasts for over 34 years'

Specials