Have you ever gone completely broke, only to find a hidden stash of cash in an unwashed pair of jeans that you put away many months ago? What a surprise! Well, this is pretty much the story of the Indian government and the Specified Undertaking of the Unit Trust of India, fondly known as SUUTI.
Indian governments in recent years have had an extremely hard time meeting the disinvestment targets they set out for themselves in the annual budget. In the five years to 2015-16, after projecting that the exchequer will raise anywhere between ₹30,000 crore and ₹43,425 crore from the sale of the Centre’s equity shares in public sector undertakings (PSUs) each year, the Centre has ended up with anywhere between ₹13,894 crore and ₹32,149 crore, well short of the target.
Disinvestment or the market sale of the Government’s shares in PSUs is a difficult business. For one, response to these offers depends on stock market conditions. If the markets are in the doldrums, as they have been for much of the last eight years, the stake sales meet with lukewarm response and fetch low prices. This is a no-no, because whenever the Government sells any assets at low prices it is criticised for corruption and short changing taxpayers. Two, when the market conditions are good, as they have been in the last couple of years, the PSU disinvestment offers have to jostle with the more-market savvy private sector companies floating IPOs to attract investor attention. This isn’t easy. The fact that many PSUs are commodity plays, from sectors such as coal, mining and metals — which are out of favour at the moment — hasn’t helped matters.
SUUTI - the cash cow
Even as the Government has been trying out novel ways to improve collections in the disinvestment kitty, it has chanced upon the neglected cash cow in its own backyard which can easily fill the hole in its budget. That cash cow is SUUTI, which if sold at today’s prices can be expected to fetch a minimum of ₹61,000 crore, far more than the whole year’s disinvestment target of ₹56,500 crore! It has now invited India’s leading merchant bankers to make a pitch for aiding it in the process of liquidating SUUTI and raising cash from it.
The Centre’s document inviting proposals from merchant bankers tells us that the SUUTI currently holds shares in three sets of companies. It owns sizeable equity stakes in private sector blue chips — Larsen & Toubro, Axis Bank and ITC. Market estimates put the Centre’s ownership at 11.1 per cent in ITC, 8.1 per cent in L&T and 11.5 per cent in Axis Bank. The stakes in these three companies alone, valued at current traded prices of these shares, would be worth about ₹60,800 crore. It holds smaller stakes in about 40 listed firms too. The Government also owns a basket of stakes in eight unlisted companies which include: UTI Infrastructure Advisory Services, NSDL, OTCEI, Stock Holding Corporation and so on. These stakes, if sold, may significantly bolster the collection of ₹60,800 crore expected from the sale of the top three holdings alone. With the process initiated, the liquidation of SUUTI holdings is expected to bring in plenty of cash to bolster the disinvestment kitty over the next three years.
Good! But how did the Government come to own stakes in private sector blue chips such as Axis Bank or L&T?
SUUTI was essentially born out of the Government’s bail-out of an ailing Unit Trust of India way back in 2003. As you may know, the Unit Trust of India was India’s first mutual fund incorporated by an Act of Parliament in 1964. An immensely popular financial institution, UTI had both market-linked schemes such as Mastershare, Masterplus and Mastervalue as well as fixed return schemes such as the Unit Scheme 64, Rajlakshmi Unit Scheme (for the girl child), Grihlakshmi Unit Scheme (for the homemaker) and Monthly Income Unit Plans in its fold. Unlike the mutual fund schemes of today, where fluctuations in the market values of the portfolios reflect immediately in the Net Asset Value (NAV) of the scheme and are borne by unit holders, UTI’s assured return schemes promised a fixed return to their investors (by way of dividends and repurchase price) irrespective of market movements.
After the stock market crash of 1999-2000, many of these schemes found themselves unable to service their obligations. For a while, they swept the problem under the carpet by continuing to pay out dividends and buy back units at the promised prices. But this Ponzi-like structure soon came crashing down as US 64’s NAV was revealed to be far below par, and the schemes began to require cash infusions from the Government to service redemption requests.
In 2003, the Government decided to step in to complete a one-time settlement with investors in UTI and initiated a restructuring of India’s largest mutual fund. To do this, UTI was bifurcated into two parts — UTI Mutual Fund, which would henceforth manage the ‘good assets’ — the market driven schemes of the Trust (which did not require bailout) and the Specified Undertaking of Unit Trust of India (SUUTI) which would take over all the ‘bad assets’ (shares, bonds and even real estate) attributable to US 64 and the assured return schemes of UTI.
The SUUTI was to receive a direct infusion of cash from the government to meet any shortfall between assets and liabilities. It was to service its obligations to all the investors in US 64 and other assured return schemes based on the bail-out package announced by the Government. The bail out incidentally did not manage to make good on all the promises of the erstwhile UTI. The US 64 offered to repurchase a limited number of units from retail investors at a fixed repurchase price. Unit holders were also given the option of bonds earning a 6.75 per cent return in lieu of their holdings. Investors in other assured return schemes were offered a phased exit at par with a bond option, with the last of these schemes wound down by April 2004.
With SUUTI managing to pay all its dues (amounting to some ₹15,000 crore) to erstwhile UTI investors, it was left with the residual assets that it acquired at the time of the restructuring. It is these assets that have grown in value and this is what the Centre is looking to liquidate today.
Lessons from SUUTI
The twist in this tale is that while the SUUTI was initially established with the purpose of offering a lifeline to beleaguered UTI investors, it has delivered unexpected payoffs to the Centre. As against the ₹17,000 crore to ₹18,000 crore at which the ‘bad assets’ of UTI were valued at the time of the takeover, SUUTI’s key stock market holdings alone are today worth over ₹60,800 crore.
The Government of today may see this as good Karma — a reward for a previous government’s willingness to take on the burden of doubtful assets and bail out distressed retail investors when they badly needed it.
Investors who had no stake in UTI may see it as a lesson in buy-and-hold investing. After all, even without having much say in the stocks in its portfolio, taking on several duds and without aggressively churning its holdings over the years, the SUUTI has managed reasonable investment returns over a 13-year time frame.
Taxpayers will probably breathe a little easier, now that there is a new cash cow to be milked to meet budget shortfalls.
But, it is the erstwhile UTI investors who were bailed out in 2003, who may have reason to feel let-down today. After all, it is their assets, parked with the SUUTI for the last 13 years, that have turned out to be the goose that lays golden eggs for the Government’s disinvestment programme.