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US-64 bonds may fetch 6.25-6.5 p.c.

By Oommen A. Ninan

MUMBAI FEB. 27 . The Government is likely to announce a coupon rate of 6.25 to 6.50 per cent for the tax-free bonds it offered to investors of the Unit Trust of India's (UTI) Unit Scheme-64 (US-64).

It was earlier decided that the US-64 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 reopening of trading on January 28 will be traded as five-year, fixed coupon, tax free, tradable bonds with effect from June 1. The bonds will mature on May 31, 2008.

The coupon rate would be structured over and above the coupon rate (yield) of five-year Government of India Securities (G-Sec), which is now at around 6.35 per cent in the secondary market. The Reserve Bank of India has privately placed a 5.73 per cent 2008 paper on January 2. This is the last primary issuance of five-year paper this year. However the yields have gone up since then and the benchmark five-year G-sec is quoted at around 6.35 per cent. So if the Government wants to make the US-64 scheme more attractive, it may even offer a 7 per cent coupon rate.

The units of the US-64 will be converted into tax free tradable, secured five-year bonds from June 1 and these bonds will be available to all unitholders. Further commercial banks and corporates will also be able to invest in these bonds. For them, expected tax-free return of 6 to 6.5 per cent would be attractive compared to the interest that they are able to earn on any other secured debt (bond) investment. Trading of US-64 on stock exchanges commenced on January 28 and indications are that the US-64 unitholders, who had purchased these units before June 30, 2001 may be able to sell their units in the market at prices higher than the prices assured by the UTI.

The buyers of US-64 units from the secondary market for Category A units (units held on June 30, 2001 up to 5,000 units per investor), that is, units repurchasable at Rs. 12 and Category B units (units held on June 30, 2001 in excess of 5,000 units), that is, units repurchasable at Rs. 10 on May and thereafter, would be effectively purchasing the units, which will be eligible for conversion into tax-free bonds as on June 1.

However, the buyers of units under Category C, that is, units bought from secondary market during November 15, 2002 to January 22 will continue to be traded and repurchasable at the net asset value (NAV) based price. The investors who bought the units from the secondary market before November 15, 2002 has been transferred to Unit Scheme-2002.

In future, UTI-I which is managing the assured return schemes would be redundant. "Assured return schemes will be closed at maturity or some of them will be closed prematurely,'' said M. Damodaran, UTI Mutual Fund Chairman and Managing Director. However, the UTI is giving a switch option for investors to move from UTI-I to UTI Mutual Fund. While UTI Mutual Fund manages Rs. 15,000 crores, UTI-I manages little over Rs. 31,000 crores.

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