Mumbai, Jan. 27: In an attempt to stop a frantic stampede of investors out of US-64 in May this year, the government today announced that units under the scheme will be treated as five-year, tax-free tradeable bonds.
The facility will be available from June 1, 2003, and is optional.
“The units of US-64 issued on or before June 30, 2001, either held by the original unit holders or by the buyers of these units in the secondary market after trading in the units is resumed on January 28, 2003, will be treated as tax-free, tradeable bonds with effect from June 1, 2003,” a government circular said.
US-64 is the largest mutual fund scheme in the country with assets under management amounting to Rs 9,800 crore, said UTI chief spokesman K. Madhava Kumar.
The bonds will mature on May 31, 2008. The bond holders will be paid interest on their holding at a rate and frequency that will be announced later.
A senior UTI official said the tax-free bonds would carry a yield similar to government securities currently ruling at 6 per cent. “It could vary as time progresses in line with market trends,” the official said.
Bond yields have been tending downwards with falling interest rates.
“The move is a clear attempt to head off redemption pressure in May,” said Sailesh Haribhakti, a corporate tax consultant.
Unit holders are allowed to redeem their units up to a maximum of 5,000 at pre-notified prices of Rs 11.60 in January, with the price rising at the rate of 10 paise every month till May this year when the redemption rate will peak at Rs 12.
Units above 5,000 units will be redeemed at Rs 10 per unit.
The pressure on the treasury if unit holders collectively decide to redeem their units at Rs 12 in May has weighed heavily on the finance ministry.
At the time of bifurcating UTI, finance minister Jaswant Singh had indicated that the total liability to the government if the entire class of US-64 unit-holders exited from the scheme would be close to Rs 6,000 crore.