US-64: Tale of woe continues
Jan 01, 2002

Author: PersonalFN Content & Research Team

US-64 finally announced its NAV for the first time on December 28, 2000 and at Rs 5.94 NAV, it cut a sorry figure with investors. For investors who have been with US-64 all this time, this is another disappointment in US-64's long history of disappointments.

Over the last few weeks, speculation about US-64's NAV had escalated in the press. Given US-64's portfolio and net assets, there seemed to be some kind of a consensus about the NAV hovering around Rs 7.50 in any case not below Rs 7.00. Therefore, Rs 5.94 comes as a major letdown to investors.

This implies that US-64's portfolio, based on which the NAV estimates were made, is more substandard than was earlier imagined. US-64's provisional portfolio (as on December 28, 2001, which was given to the media) comes as a revelation. There are close to 550 companies in it, with equities in about 500 of those companies and debt in the balance. After the Cyberspace Info fiasco, US-64's investment decisions had come under close scrutiny. It became increasingly clear that a lot of US-64 investments were guided by considerations other than the company's fundamentals. The latest portfolio only reinforces this belief.

The problem with US-64 is that it doesn't affect only the investors in the scheme, it affects every tax-paying citizen in the country. Its already affected us in the past (in 1998) when the government salvaged the scheme with a Rs 33 bn (Rs 3,300 crores) bailout. As the NAV stands today (roughly Rs 5.9) the government's bailout package this time around could be about a lot more. At Rs 5.9 NAV, the discount to the repurchase price (Rs 12), which the government is committed to paying, amounts to over Rs 50 bn. Put together, the government's bill towards the US-64 bailout could amount to over Rs 80 bn. At US-64's assets under management Rs 136 bn (as on December 28, 2001) a Rs 80 bailout works out to 59% of net assets! Of course, the bailout amount could reduce if there is an improvement in market sentiment.

Rs 80 bn is a heavy price to pay for (mis)managing investments, which the government isn't supposed to nor qualified to do in the first place. But US-64 was too precious for the government to part with so easily, so it stuck with it despite the obvious erosion of value for the government and the tax-payers. Of course, now there are a lot of structural reforms on the anvil for US-64, which hopefully will make such bailouts a thing of the past. But think about it, the money squandered in propping up US-64 could have been really handy for a developing economy like India in propping up literacy, power, infrastructure, agriculture.

We recommend that existing investors with US-64 should use the administered price to exit from US-64. US-64's structural problems are a little too complex and it could take a long time for the scheme to sort out these issues. Meanwhile, investors, who we are sure have had enough with US-64, should make good their exit.

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