The recovery in the scheme will help UTI move gradually towards NAV-based pricing. This is likely to be done by gradually narrowing the gap between the pricing of the US-64 units and its NAV. UTI is expected to adopt a soft-landing approach to ensure that existing investors are not hurt. However, as a first step, UTI will be bringing down the dividend to around Rs 1.50 compared to Rs 2 last year. The sale price for July is likely to be pegged at around Rs 13.50 and the repurchase price lower at Rs 13.20 (assuming a gap of 30 paise).

With a gap of around Rs 1.20 between the repurchase price and the NAV of Rs 12, there would still be an overall shortfall of Rs 1,742 crorein the corpus. If UTI pays a dividend of Rs 1.50, the adjusted NAV will be around Rs 10.50 and the gap will be around Rs 3,900 crore. This is still a phenomenal improvement over the shortfall in the corpus of Rs 6,605 crore last year.

Since UTI has a three-year time frame to move towards an NAV-based pricing, the Trust is expected to avoid any crashlanding. An abrupt switchover to NAV-linked pricing will hurt existing investors though the scheme will be very attractive to new investors who can look forward to a tax-free return of close to 11 per cent.

Though year-on-year the BSE Sensex has risen by 27.3 per cent from 3,250 points on June 30, 1998, to 4,140 points on June 30, 1999, the benefit of appreciation to the US-64 scheme is limited to around 15 per cent. This is so because the Sensex has been pulled up by a handful of stocks while US-64 is saddled with a whole lot of scrips which have not seen much appreciation. The other prop to the scheme has come from the swapping of PSU stocks with a book valueof Rs 3,300 crore in US-64 with government securities for an equivalent amount. UTI has reduced the size of the Special Unit Scheme package to Rs 3,300 crore from Rs 4,800 crore as a number of PSU stocks have seen considerable appreciation in the last few weeks. This will help UTI exit from some of these stocks in US-64.

Insight

Slow and risky

The UTI has weighed its options carefully and chosen the long drawn out one. One choice was to immediately reduce the repurchase price to match the NAV so that fund could start on a clean slate. The current choice means that the fund is dependent on sustained net inflows, which is not certain given the fact that the annual returns, including the repurchase price, are clearly aligned with the market and are not certain to increase. In fact, the confidence of investors in the scheme will critically depend on the market.

Aaron Chaze