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Wednesday, September 2, 1998

Canara Bank caught in a bind 

R Meenakshi  
Many nationalised banks have not only burnt their fingers but even their hands because of their mutual fund schemes. They started many such schemes in the wake of an artificially booming capital market in the early 90s. At that time all stock market indices seemed to be heading towards the sky. So these nationalised banks also made tall promises to their investors like doubling or tripling their investment in a short span of time. No responsible authority including the government of India, finance ministry, department of banking, Reserve Bank of India bothered about checking these unhealthy trends. Nobody also bothered about how these nationalised banks would redeem their pledges if the capital markets crashed which was what happened subsequently.

Canara Bank suffered for honouring its promise towards its mutual fund scheme Candouble. Indian Bank, which itself had incurred a huge loss, had to cough up money in order to fulfill its promise towards its Ind Jyoti scheme. Now it is the turn of Canara Bank againto face the music with regard to its scheme Cantriple Plus. Hoping that Canara Bank Asset Management Company would redeem the Cantriple plus units at Rs 30 per unit, many investors had bought the units in the secondary market in the last couple of weeks. But now uncertainty is ruling the roost and so there is a selling pressure in the counter. A few months back the units were traded at a discount to their NAVs. Like many such schemes, Cantriple Plus was also started in the midst of a booming capital market. Canara Bank is now taking a stand that the returns mentioned in the prospectus were only an indicative value and not a firm assurance.

Even though the prospectus of Cantriple Plus clearly stated that there was no connection between the name of the scheme and its future prospects and returns, nevertheless, investors were misled to think that their returns would earn more than three times the investment value. In other words, Canara Bank simply played word jugglery. Off course marketing, advertising andsales tactics involve playing with words to attract the attention of prospective customers, but this can be self defeating for the customers if the perceived assurance is not carried out by the company question.

If Canara Bank Asset Management Company ultimately washes its hands off the scheme and leaves investors in the lurch, it could face protracted legal battle in the courts. But there is a difference between Canstar and Cantriple Plus. Canstar had many retail investors and so any one of them could have gone to the courts and embarrassed Canara Bank Asset Management Company. But in Cantriple Plus scheme, there are many institutional investors and it is relatively easier than dealing with a retail investors for an asset management company operating in India. This is because of inter-connections between many institutions. But this does not mean that an institution will not drag an asset management company to the court. Indeed, Canara Bank itself had been sued by National Housing Bank in the early 90s inthe wake of the capital market scam which broke out during the boom.

Retail investors plunged into the scheme of things only since the beginning of the year hoping that Canara Bank Asset Management Company would redeem the Cantriple Plus units at the indicative value of Rs 30 per unit at the time of redemption in June, 1999. If this were to happen, retail investors who had purchased the unit in the secondary market will be getting a return of more than 100 per cent per annum. On the other hand, if the asset management company washes its hands off, then retail investors who had bought the units will have to sell their units at a discount and suffer a loss. Moreover, equity markets are expected to fall further because of political instability, east Asian currency crisis, Japanese slump in economy, Russian catastrophe and a recession in the global economy. If this happens, investors' woes will be compounded further and the NAV of the scheme will fall further. The scheme has a unit capital of Rs 285 crore. Thefund has a 49 per cent investment in equity and 51 per cent investment in debt and other fixed return schemes.

Even if the entire trend in the capital market is reversed in a short span of time and bulls start dominating the market, the scheme is unlikely to post a net asset value of Rs 30 because of its limited exposure to equities. Canstar scheme bled the balance sheet of Canara Bank as it had to pump in Rs 600 crore to redeem the Canstar units at Rs 23 per unit. If Canara Bank is again to pump money to redeem Cantriple Plus units at the indicative value, then it will have to shell out another Rs 400 crore. Canara Bank may very well do it as there are no shareholders to question its action as the government of India is the majority shareholder in the bank. But once privatisation takes place and the government disinvests a portion of its holdings, shareholders of the bank will question and grill the management in the AGM.

What is more, Canara Bank has decided to bail out investors in Canstar scheme whomissed the bus by not opting for repurchase at Rs 23 under the offer announced in October, 1997. The management says that around 20,000 envelopes sent to unit holders were returned for want of clear address. This can be taken only with a pinch of salt. The high figure of returned envelopes clearly shows that either the bank management was acting deliberately in not mentioning correct addresses or else there was a rampant negligence in the despatch department in writing down the addresses. But, actually, asset management companies computerise all the records of the unit holders and it is the computer which prints the addresses of all the unit holders on the required form which is mailed to unitholders in a window envelope. Computer on its own will not write a wrong address. The data entry of inputs including addresses should have been wrongly keyed in at the time of entering into computers. This again shows sheer negligence of the management. Efficient data entry operators should have been deployed to do thejob in such matters so that data entry errors are reduced to the minimum if not eliminated altogether. By extending the redemption to those who missed the offer earlier, Canara Bank is going to incur a loss of Rs 30 crore. "Here is a bank that cares" is the message the bank is trying to send but markets may perceive the message "Here is a bank that does not care about its profits".Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.

Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.


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