Canstar units to be repurchased at Rs 40

Aabhas Pandya

Canbank Mutual Fund's decision to redeem Canstar units at Rs 40 is likely to cause heartburn among those investors who had opted for repurchase at Rs 23 per unit in 1997. The "magnanimous" offer from the mutual fund comes after its sponsor Canara Bank bought back almost 95 per cent of the units with a one-time offer at Rs 23 three years ago. The AMC has now decided to pay Rs 40 per unit in the fund, when it comes up for redemption on September 17, 2000.

A unitholder who has stayed invested in the fund and will now receive Rs 40 per unit, the annualised yield works out to 14.85 per cent. However, the yield is only 12.61 per cent for those investors who had opted for repurchase after seven years in September 1997. In fact, Canara Bank had announced the repurchase at Rs 23 just a few days before the stated repurchase price was to go up to Rs 26.50 per unit.

Currently, Canara Bank holds almost 95 per cent of the fund's unit capital of Rs 6.07 billion as on March 31, 2000. This means that other than Canara Bank, there are still some investors who continue to hold on to their Canstar units and did not opt for a repurchase in 1997. These investors hold some 30 million units and will now get an opportunity to redeem their units at Rs 40 per unit. It may be recalled that Canara Bank had paid Rs 13.28 billion in 1997, when it decided to buy Canstar units at Rs 23 while the prevalent NAV was around Rs 11. There has been a marginal improvement in the NAV of Canstar since then with the NAV at Rs 12.99 as on July 26, 2000.

Meanwhile, speculators have descended on the Canstar counter on the bourses. A listed fund, the market price of Canstar units was frozen on July 31, 2000 at the Bombay Stock Exchange at Rs 28 with a volume of 30,000 units. For a buyer at Rs 28, the gains work out to a handsome Rs 12 per unit with a holding period of only two months (assuming that it takes another fortnight to receive money). The returns translate into a whopping 42.85 per cent in two months or a simple annualised return of 257 per cent. The book closure of the scheme will commence on September 9 for updation of records.

Now, for an estimation of the actual loss that Canara Bank will have to bear on redemption on Canstar units in September 2000. Assuming the current NAV of Rs 13 on the day of redemption, the AMC would earn Rs 7.9 billion from the redemption of 607.6 million units. Had the bank redeemed the entire 607.6 million units at Rs 40 (totalling Rs 24.3 billion), it would have taken a hit of Rs 16.4 billion. However, Canara Bank has already paid Rs 23 per unit for 95 per cent of the unit capital, which translated into a payout of Rs 13.28 billion, thereby limiting the outflow.

Further, the bank would have to bail out its AMC when it pays Rs 40 for 30.3 million outstanding units with the remaining investors. This means another payout of Rs 1.21 billion. Thus, the bank will bear a total liability of Rs 14.49 billion against realisable gains of Rs 7.90 billion, thus suffering a loss of Rs 6.59 billion.

Canstar was launched as a 10-year closed-end balanced fund in 1990 with repurchase at a stated price after three years. The repurchase price was to be revised every year. Besides, listing on major stock exchanges provided liquidity. However, with the NAV of the fund falling substantially below the stated repurchase price in 1996, the AMC could not honour repurchase at the stated price of Rs 23 and suspended repurchase of units.

Source: Value Research

Fund News

Money

Tell us what you think of this report