The Telegraph
Since 1st March, 1999
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US-64 investors left in the lurch

Mumbai, March 1: The Unit Scheme-64 investors are still in the dark about the interest rate on the five-year, tax-free tradable bonds, an option provided to hapless investors in lieu of their existing units.

Investors had hoped for a hint in the budget but were disappointed. “We were also surprised that the finance minister did not even mention it in his speech,” a senior UTI source said.

“We were also expecting the government to fix the interest rate on the five-year tax-free tradable bonds in the budget,” he added. “Probably, the decision has been stalled temporarily to ascertain the way the government securities (G-Sec's) move in the markets.”

The Union Budget 2003-04 has proposed a cut in small savings like public provident funds, NSCs and relief bonds by 100 basis points.

The proposed five-year tax-free bonds in lieu of US-64 would now also move in tandem with the new rates applicable on small savings instruments because of this steep cut.

Earlier, the indication was that the proposed bonds would attract an interest rate similar to the G-Sec rates prevailing in the market.

After yesterday's revision in the budget, the yield rate for G-Secs have moved further southwards. The finance ministry, which is in charge of UTI-I, will carefully monitor the behaviour before fixing the rates. “The government will also try to make it look attractive because otherwise the investors will press for repurchases,” an analyst tracking the Trust said.

Therefore, a government that is already grappling with a bloated fiscal deficit will again be put under pressure as it has to make good the difference between the net asset value of US-64 and the assured amount of Rs 12 in May 2003. This will add up to an outgo of over Rs 10,000 crore for the government. This sum also includes monthly income plans where similar assured returns were promised.

The government had announced last month that the flagship scheme of the newly created Unit Trust of India (I) will be treated as five-year, tax-free tradable bonds.

The move will take effect from June 1, 2003, and is optional, the government circular had said.

“US-64 units that were issued on or before June 30, 2001; either held by the original unitholders or by the buyers of these units in the secondary market after trading in the units and resumed on January 28, 2003 will be treated as tax-free, tradable bonds with effect from June 1, 2003,” the circular had said.

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