Canstar Verdict Seen Only After Union Budget

The controversy involving the repurchase of Canstar, the close-ended scheme from Canbank Mutual Fund, is likely to hang fire for some more time.

An industry source said the proposed meeting between the Securities and Exchange Board of India (Sebi), Ministry of Finance (MoF), and the Reserve Bank of India (RBI) to solve the problem has been put on hold as "the MoF officials were busy over giving the final touches to the Union Budget".

Under the terms of the Canstar offer document, Canbank is required to repurchase Canstar units at Rs 23 per unit this year.

However, Canbank Mutual has argued that since Canstar's current net asset value (NAV) is Rs 11, it cannot fulfil its commitments to investors.

 

But Sebi has taken a tough stand and wants investors' interests to be safeguarded.

According to P R Nayak, chairman of the board of trustees of Canstar Mutual Fund, "Sebi had asked Canara Bank (the sponsor of Canbank asset management company and promoter of Canbank Mutual Fund) to find a way to pay the Canstar unitholders."

While Sebi feels that Canbank should not go back on its promises and "should at least pay the unitholders for this year with the hope that markets would be better in 1998,"

Canbank has contended that with a net asset value of Rs 11, it cannot pay its investors.

On the question of Canara Bank standing as a guarantor, a Sebi source said that as the State Bank of India (SBI) had once paid up for the shortfall in SBI Magnum redemptions, Canara Bank should take a similar approach.

But Nayak said promoters and funds should always have "an arm's length relationship". This Sebi regulation, he feels, negates any possibility of Canara Bank bailing out Canbank Mutual.

"Also, if Canbank Mutual borrows to meet Canstar's redemption needs (as stipulated by the new mutual fund regulations), it would prove to be an additional burden on the remaining investors of Canstar," Nayak said.