The Hindu Business Line : US-64 units trade at a premium

US-64 units - cash income (CI) Rs 12 and CI Rs 10 - are trading at a premium to their current repurchase price, an indicator that several investors may be buying the units to redeem them for Government bonds instead of cash, when encashment begins in May.

On the National Stock Exchange on Wednesday, more than 10 lakh units (CI Rs 10) and about 55,000 units (CI Rs 12) traded at a premium in the range of 25-40 paise to the current redemption price of Rs 11.80 (for units CI Rs 12).

The Government's cash outgo would be less to the extent of investors redeeming their units for bonds instead of cash.

The Government has promised 6.75 per cent, five-year tax-free bonds or Rs 12 per unit cash in lieu of the first 5,000 units held before June 30, 2001. Beyond that, unit-holders will get Rs 10 per unit.

When the repurchase scheme was announced last year, UTI had estimated the cost to bridge the shortfall to the NAV in the scheme to be in the region of Rs 5,000 crore at the then prevailing prices. However, the burden is now likely to be substantially less.

Mr B.S. Pandit, Executive Director of UTI, told Business Line: "In the current tax regime, the bonds being offered are among the most attractive, if not the most, investment options available in the market. The fact that several people are willing to pay a premium to acquire US-64 units is testimony that they are attractive."

On Wednesday, US-64 (CI Rs 12) touched a high of Rs 12.20 before closing at Rs 12.05 a unit. US-64 (CI Rs 10) touched a high of Rs 10.20 a unit.

As per the Centre's redemption scheme, the repurchase price for US-64 CI Rs 12 for the month of March is Rs 11.80 per unit. It would be Rs 11.90 for April and from May onwards, Rs 12 per unit.

US-64 (CI Rs 10) has been furiously trading and the volume has been in the range of a few lakhs every day this month. US 64 CI Rs 12 touched a closing high of Rs 12.80 on March 3. However, on that day only two units changed hands.

The volume has since swelled and, over the past three weeks, a total of three lakh units were traded. The volume touched a high of 75,000 units on March 12.

According to financial analysts, depending on the tax bracket a person is in, the actual pre-tax yield from the bond could range between 7.5 per cent and 10.5 per cent, which is a significantly better reinvestment option given the current easy interest rate regime.

Mr Pandit said, "Compared to bank fixed deposits, the bonds have the advantage of being tradeable, besides the Government guarantee on payment of interest and principal."

Most public sector banks offer an interest rate between 5.75 per cent annually and 6.5 per cent per annum for five-year maturity.

For individuals in the 30 per cent tax bracket, the yield could work out to nearly 9.65 per cent. Even for those in the lower income group, the yield could be about 7.5 per cent.

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