Redemption pressure of US-64 leads to dilution of key stock holdings

Once considered the flagship scheme of Indian Mutual Fund industry, the UTI US-64 scheme is finally (much to the relief of Indian government) coming to end with its US-64 bonds maturing on May 31, 2008.

The redemption would mean payments of close to Rs.8,000 crore to over 12 lakh investors by Specified Undertaker of Unit Trust of India (SUUTI). SUUTI was formed as a result of the split of erstwhile UTI into UTI AMC (which got all the NAV based schemes) and SUUTI (which got large equity holdings, properties and 25 assured return schemes).

Since all schemes under SUUTI are matured or close to being mature, the Government has no option but to wind it up and as such it had to liquidate its assets to meet payment obligations.

SUUTI has 27% stake in Axis Bank (worth Rs.8000 crore), 12% in ITC (worth Rs.9350 crore) and 10.5% in L&T (worth Rs.7000 crore at current market price). According to ET, the Govt. is likely to first offload its stake in Axis Bank through private placement to institutions.

SUUTI has also stakes in NSDL, NSE and SHCIL, though it is unlikely to sell these holdings but may consider transferring the stake to other Government institutions. Although SUUTI does not need to sell the holdings at once as it can meet the redemption requirements out of its investments in government securities, debentures, oil bonds and fixed deposits.

SUUTI has also hold of prime land and have sold property worth Rs.600 crore. The sale proceeds is most likely to be used by Government for funding of social sector programmes.

In case of Axis Bank, selling the entire stake to a single investor could yield maximum value as it would factor in a control premium, however this scenario is unlikely due to strict banking regulations.

Once the stake sale begins, there may be certainly some interest in these stocks as there may be apprehensions about the role of the new investor and whether his investment is just financial or strategic in nature.