News reports indicate that the government is planning to make dividend declared by the various schemes of UTI tax-free. This is keeping in line with the market expectations that a reduction in US-64's re-purchase price is ruled out. To revive investor confidence, UTI may actually hike the repurchase price. However, some other options and the logic of the proposed move need to be examined in detail.

A leading merchant banker points out that the CRR should be cut. This will lead to an increase in liquidity and as a result, interest results will fall. This will mean that yeilds will also fall as the demand for existing securities with higher coupon rates will increase and this will mean better appetite for US-64 and a better debt portfolio for the scheme. The logic of cutting CRR at this stage is, therefore, simple. In future, no chairman of UTI should ever be able to declare that the RBI did not frame its policy keeping UTI in mind.

In case, the dividend declared by various schemes of UTI ismade tax free, other mutual funds will demand the same but it should not be granted on the grounds that UTI is not a mutual fund. Prior to the amendment and consequent deletion of Sec 80M, US 64 was a favourite of money markets because of good liquidity and returns (including tax breaks). Instead of making UTI dividend tax free, the option of reintroducing Sec 80 M could also be considered. So long as the dividend declared by a company is more than or equal to the dividend earned from any scheme of UTI, dividend (earned and declared) should be tax free. It will mean that yields for companies will go up by 10 per cent as dividend tax won't have to be paid. The move can be dubbed as "in the interest of small investors" and any benefit to UTI can be termed "incidental and unintentional".

It does not matter that US-64 has never declared or computed its NAV. Unless the trouble is taken to do the same, mere speculation on decline in NAV of UTI will continue to have an impact on market and thereby the portfolio ofUTI. It is high time that the government stops standing behind UTI, loss-making PSUs, SEBs and stands behind the investing community.

Rallis India

Rallis India's unaudited results for the six months ended September, 1998, show that net sales have witnessed a growth of 4.73 per cent over the corresponding period in 1997-98 to touch Rs 643.49 crore. The increase in expenditure has been lower at 4.65 per cent and as a result, operating profit has risen by 5.39 per cent to Rs 45.99 crore. Operating margins have improved from 7.08 per cent to 7.15 per cent.

Had the company not had an exposure to its DAP and MoP businesses, the improvement in operating profits would have been much more. While the import of these nutrients had become more expensive during the period, realisations from sales did not increase because of controlled retail prices. Besides, the level of government subsidy on such fertilisers failed to increase to compensate for the rise in costs. Even the disbursement of the subsidy that thecompany should have received during the period has been delayed and this has led to a higher level of borrowings. As a result, interest costs have increased by a phenomenal 43.64 per cent.

The impact of higher interest costs can be seen from the drop in the company's cash margins from 4.64 per cent to 3.75 per cent. Cash profit has fallen by 15.35 per cent to Rs 24.21 crore despite the 6.63 per cent rise in gross profit to Rs 48.6 crore. However, the fall in pre-tax profit has been lower at 12.07 per cent to Rs 20.90 crore because of a Rs 1.90 crore profit from sale of assets/investments. A lower tax provision has ensured that the fall in net profit, which stood at Rs 16.30 crore, has been even lower at 6.16 per cent.

Though there has been a decline in the company's profitability, the market seems to be optimistic about its future. The stock has seen an erosion of 19.87 per cent during the six month period April-September and is now trading at around Rs 110-115. However, it has continuously outperformedthe Sensex which witnessed a decline of 22.62 per cent in the same period.

Tata Sons

Investors might remember the Tata Sons rights issue of 1996, which was undertaken primarily to hike its stake in various group companies. The move was severly critisiced on the grounds that funds from the listed Tata Group companies were utilised for consolidating cross holdings.

However, with the southward spiral of the Telco scrip continuing unabated, with the stock closing at Rs 102.8 (a new two-year low) on Friday last and bear operators also hammering the Tisco scrip (which is also quoting at well below the Rs 100 levels at Rs 75.50). The depressed scrip prices give impetus to one important question for Tata Sons--is this not the ideal time to hike their stake once again in these group companies?

More importantly if Tata Sons were to invoke the creeping acquisition route and acquire two percentage points at the prevalent market price, it would help ease the selling pressure on the stock, which wouldobviously be beneficial to shareholders.

Thus, instead of passively waiting for the government to make up its mind on buy-back, Tata Sons could mop up shares of group companies for restoring shareholder interests. More importantly, this could also be a lesson for errant managements to follow.

(With contributions from Urmik Chhaya, Sarad Saraf & Percy Dubash)