Indian mutual fund giant seeks $319m loan

UTI the biggest investor in India's share markets, with more than $21 billion under management

By staff and wire reports

BOMBAY, India -- India's largest fund manager, the Unit Trust of India, has asked the State Bank of India for a Rps15 billion ($319 million) loan to meet a temporary cash flow shortage.

Chairman P.S. Subramanyam said the loan was being sought to cover any gap between incoming and outgoing cash caused by the abolishment of carryforward trading in India from July 2.

Carryforward trading allows traders to carry over positions from one settlement period to the next by paying a margin.

It allows them to take larger positions than might normally be possible, but has been cited as the cause for intense volatility on India's share markets and will be replaced with a rolling settlement system.

Subramanyam told Reuters that UTI had requested asked for a stand-by facility "to bridge the gap, which may occur after the July 2 trading changes".

Largest investor

The fund manager is the largest direct investor in India's stock markets, with more than Rps600 billion ($12.7 billion) under direct management.

The total value of the mutual fund industry is estimated to be more than Rps980 billion ($21 billion) across more than 550 different schemes.

Tens of millions of private investors have plied their money into the UTI, which has invested in more than 100 schemes, but as asset values have deteriorated there has been a rush to sell units back to the trust.

In May, record numbers of trust holders redeemed units valued at some Rps20 billion, which the UTI was forced to buy back.

"Borrowing could be an exceptional situation for a few days to honor redemptions," Reuters quoted Dhirendra Kuma, managing director of Value Research, as saying.

Observers say there is a perception that UTI units are overvalued. The mutual fund manager announced a repurchase price for its units of Rps14.25 in May.

The fund manager does not reveal the value of its net asset value, but it is thought to be less than Rps10 per unit.

Full value

"UTI's repurchase price appears to be higher than its net asset value and the market continues to recede, so investors are eager to sell their units, it's as simple as that," one Bombay-based fund manager told CNN, on condition of anonymity.

UTI will face additional cash flow pressure on July 2 from dividend payments on its flagship US 64 equity scheme.

In July last year the scheme paid a dividend of 13.5 percent, which analysts believe may be revised downwards this year.

Reuters contributed to this report.