Opportunities Missed in India
From TheStreet.com
Greed & Fear column by Christopher Wood
10/18/98 4:00 PM ET
thestreet.com
There has been an unpleasant development on the subcontinent. It relates to problems at Unit Trust of India, the country's biggest institutional investor.
The result is that time is now running out for the Indian government. Although India has remained a relative safe haven from the Asian crisis thus far, the government has done woefully little in terms of financial reform to capitalize on this huge opportunity to attract foreign portfolio investment.
UTI has been forced by its auditors to reveal that the flagship US64 fund's NAV was Rs 9.90 per unit, ie below par value of Rs 10. Even though UTI was aware of this, it went ahead and distributed dividends in June, thereby using up the reserves.
More controversially, the fund has maintained resale/repurchase prices of the units at around Rs 14.5 per unit, a 50% premium to the NAV.
This has been done seemingly to maintain the confidence of investors, who it is presumed will not bother with such technical details as NAV and will continue to invest.
What this means in practice is that new investors are subsidizing existing investors, while those selling out could receive more than 50% of the true value of their assets.
The logical consequence of this should be a run on the fund. However, corporates have been unofficially requested not to redeem their investments. In the near term they will have to comply, since UTI would have to sell its shares in the market to generate cash.
UTI was formed by an act of parliament, and is thus outside the regulatory purview of the Securities Exchange Board of India. In the past it has acted on behalf of the government to "support" prices, which meant investment decisions were not always taken for purely investment reasons.
For now the government will continue to come out in support of UTI, since the government needs a strong stock market for its privatization program.
Any run on UTI would mean a further loss of investor confidence. The government has a vested interest in keeping the market up, and, given present easy domestic liquidity, it should succeed.
The Indian stock market has probably found a floor at around the 2800 level on the BSE Index. But this latest setback, entirely unrelated to corporate earnings trends, is not positive for equity investment in India, and has had the effect of causing more foreign investors to reduce holdings.
The saga of missed opportunities in India borders on the exasperating.
Christopher Wood, the author of Greed and Fear, is the global emerging market strategist for Santander Investment. He is the author of The End of Japan Inc. (Simon & Schuster, 1994). |
