The Telegraph
Since 1st March, 1999
Email This Page
Bonds stem US-64 cash drain

Calcutta, April 13: Unit Trust of India (UTI) will have to shell out around Rs 2,500 crore in cash for redemption of its flagship scheme, US-64. This is a sum the management says will not be inconvenient for the fund.

The Trust will issue bonds worth Rs 8,000 crore to investors who chose to convert their units into the government guaranteed security that the Trust offered to avert an exodus.

Thanks to an overwhelming response to the 6.75 per cent tax-free bond, Unit Trust will not have to borrow from banks to fulfil its redemption obligations.

The Trust had offered investors of US-64 a choice between redemption and conversion of their holdings into five-year bonds. It said it would pay Rs 12 up to 5,000 units, and Rs 10 for each unit in excess of that figure.

But investors who had fewer than 417 units — or those who would receive less than Rs 5,000 on redemption — were not given the option of conversion into bonds.

B. S. Pandit, executive director of the Trust, said: “We will be paying around Rs 700 crore to investors who did not have the option of converting their holdings into bonds. In addition, we will pay around Rs 1,800 crore to investors who exercised the redemption option. Some four lakh investors chose to exit the scheme.”

The US-64 bond is the best tax-free debt instrument in the market at present.

Interest on the bond will be paid every six months, which increases its annualised yield to 6.86 per cent. The next best tax-free instrument offers 5.2 to 5.3 per cent.

Even before it is issued, there is a huge demand for the US-64 bonds among companies and high net-worth investors who typically park excess cash in liquid debt instruments.

The attractiveness of the bond is manifested by the fact that units of US-64 are trading at a premium on the National Stock Exchange (NSE).

Despite the carnage in the equity markets over the past few days, US-64 units closed at Rs 12.20 and Rs 10.25. (Units with repurchase values of Rs 12 and Rs 10 are traded separately.)

Experts say the yield on the US-64 bond is going to gravitate towards the 5.2-5.3 range, and as a consequence, its price in the secondary market will rise. Debt market observers expect the secondary market price to settle at around Rs 105 before the first ‘coupon date’ — or payment of half-yearly interest — in December.

A significantly large number of investors decided to convert their holdings into bonds in the hope of capital gains. Their bet will pay off, unless interest rates are raised.

“You could expect a large number of small investors — particularly, those who do not come under the tax net — to shift their investment to instruments that offer higher returns. However, for the time being, they stay put in the hope of making a bit of extra money by way of capital gains,” explains an investment adviser.

Email This Page