The US-64 Controversy

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Case Details:

Case Code : FINC003
Case Length : 8 Pages
Period : 1990 - 2000
Pub. Date : 2002
Teaching Note : Available
Organization : UTI India
Industry : Financial Services
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"They have cheated us. I am telling everyone to sell. If they are stupid and offering Rs 14.25 for paper worth Rs 9, why should I let go of the opportunity?"

- An unhappy US-64 investor in 1998.

Can of Worms

In 1998, investors of Unit Trust of India's (UTI) Unit Scheme-1964 (US-64) were shaken by media reports claiming that things were seriously wrong with the mutual fund¹ major.

For the first time in its 32 years of existence, US-64 faced depleting funds and redemptions exceeding the sales. Between July 1995 and March 1996, funds declined by Rs 3,104 crore.

Analysts remarked that the depleting corpus coupled with the redemptions could soon result in a liquidity crisis. Soon, reports regarding the lack of proper fund management and internal control systems at UTI added to the growing investor frenzy.

By October 1998, US-64's equity component's market value had come down to Rs 4200 crore from its acquisition price of Rs 8200 crore.

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The net asset value (NAV)² of US-64 also declined significantly during 1993-1996 due to turbulent stock market conditions.

A Business Today survey cited US-64's NAV at Rs 9.68.³

The US-64 units, which were sold at Rs 14.55 and repurchased at Rs 14.25 in October 1998, thus were around 50% and 47%, above their estimated NAV.

Amidst growing concerns over the fate of US-64 investors, it became necessary for UTI to take immediate steps to put rest to the controversy...

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1] An enterprise that pools funds from customers and invests them in a portfolio of securities theoretically in keeping with the goals and principals stated in its prospectus.

2] The Net Asset Value of a mutual fund the current value of its shares calculated as the fund's assets minus liabilities divided by the number of outstanding shares.

3]- Total fund value = Value of debt holdings (Rs 6532 crore) + Value of equity holdings (Rs 8200 crore) + Value of real estate (Rs 386 crore) = Rs 15,118 crore.
- Total number of outstanding units = 1562 crore units.
- NAV = 15,118/1562 = Rs 9.68.