The US-64 Controversy

"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. 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 9.683. 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.

Creating Trust

UTI was established through a Parliament Act in 1964, to channelise the nation's savings via mutual fund schemes. This was done as in the earlier days, raising the capital from markets was very difficult for the companies due to the public being very conservative and risk averse. By February 2001, UTI was managing funds worth Rs 64,250 crore through over 92 saving schemes such as US-64, Unit Linked Insurance Plan, Monthly Income Plan etc. UTI's distribution network was well spread out with 54 branch offices, 295 district representatives and about 75,000 agents across the country.

The first scheme introduced by UTI was the Unit Scheme-1964, popularly known as US-64. The fund's initial capital of Rs 5 crore was contributed by Reserve Bank of India (RBI), Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) and other scheduled banks including few foreign banks.

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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.