Unit Scheme-64 units acquired from the secondary market on or after January 24, 2003 will also be eligible for conversion into 6.75 per cent, tax-free bonds to be issued by the government. US-64 scheme will cease to exist from June 1, 2003.

N K Garg, president, department of funds, UTI Mutual Fund, who currently manages the US-64 portfolio, said as a result of this clarification, "We expect the trusts and other corporate that stayed invested in US-64 to opt for the bonds."

The government has recently announced that US-64 investors would be given an option to convert their US-64 holdings into 6.75 per cent tax-free bonds, which can be traded in the secondary markets. These bonds are to be issued on June 1, 2003 and will mature on May 31, 2008.

Investors can exercise the bond option between March 15 and April 4. Commenting on the future operations of the scheme, Garg said, "It is at present unclear what will be the strategy of the fund or how it will operate." Garg also added, "However, there would be no sale of securities in the current depressed market to meet redemption pressure as the government is supporting the scheme and there is no need to offload the US-64 portfolio in the market."

Trading volumes of US-64 units on the National Stock Exchange (wholesale debt market) has picked up sharply in the last few days. More than nine lakh (900,000) units were traded at Rs 10.20 on Friday under Rs 10 category.

Another 30,000 units were traded on Friday at Rs 12.05 in the Rs 12.00 category.

The effective yield on these bonds works out to 10.38 per cent for corporates and individuals at the marginal tax rate of 35 per cent and above. In the 30 per cent tax slab, the effective yield would be 9.64 per cent and 8.44 per cent in the 20 per cent tax slab. "At current market rates, this is a very encouraging investment opportunity," Garg added.

The fund will buy back up to 5,000 units per investor at Rs 12 in May 2003. Additional holdings will be redeemed at Rs 10 a unit. The scheme will cover all US-64 units issued on or before June 2001 either held by the original unitholders or by buyers of these units in the secondary market after the scheme reopened for subscription on January 28, 2003.

Meanwhile, the market value of Unit Trust of India's flagship scheme US-64 increased by 0.99 per cent at Rs 10,529.39 crore ( Rs 105.29 billion) as on February 28 compared with Rs 10,425.37 crore (Rs 104.25 billion) in January.

The value of equity and equity related investments for February was also higher at Rs 6,600.49 crore (Rs 66 billion), Rs 6,460.95 crore (Rs 64.60 billion) in January, according to investment portfolio data released by UTI.

The top five equity holdings of the scheme were RIL at Rs 1,628.49 crore (Rs 16.28 billion) or 15.47 per cent of market value, ITC at Rs 769.97 crore (Rs 7.69 billion) or 7.31 per cent, Infosys at Rs 312.11 crore (Rs 3.12 billion) or 2.96 per cent, Hindustan Lever at Rs 224.53 crore (Rs 2.24 billion) or 2.13 per cent and BPCL at Rs 202.91 crore (Rs 2.02 billion) or 1.93 per cent, it said.

Flashpoints

Investors would be given an option to convert their US-64  holdings into 6.75 per cent tax-free bonds.

These bonds will be issued on June 1, 2003 and will mature on May 31, 2008.

The effective yield on these bonds works out to 10.38 per cent for corporates and individuals at the marginal tax rate of 35 per cent and above.

In the 30 per cent tax slab, the effective yield would be 9.64 per cent and 8.44 per cent in the 20 per cent tax slab.