Investors trust US-64 bonds

MUMBAI: The Union government has averted the need to pay Rs 6,500 crore to bail out the Unit Trust of India as its strategy to offer tax-free bonds to US-64 investors, instead of cash, seems to have paid off.
As on April 10, the deadline for investors to opt for bonds or to redeem their units, only Rs 1,700 crore worth of redemptions had been reported.This means that the Centre has to cough up only about Rs 800 crore towards the shortfall of the redeemed units against a provision of Rs 6,500 crore.
Confirming this, a top UTI official told this newspaper that about 84 per cent of the unitholders (in value terms) had opted to remain with the Trust by converting their units to 6.75 per cent tax-free bonds.
Market sources said that this development would have a positive impact on the stock markets as fund managers and analysts had factored in major selling pressure on those blue-chip stocks where UTI has substantial holdings.
UTI has major holdings in companies like Reliance Industries, ITC and HLL, and analysts had warned major selling pressure on these stocks to meet the possible redemption pressure.
‘‘We have the assurance from the government that the Trust need not sell in the open market even to meet the redemptions as on May 31, that too when the markets are quite depressed at this point,’’ the official said.
US-64 has an asset base of Rs 10,800 crore and UTI had sent option letters to 26.5 lakh unitholders seeking their choice on whether to convert their units into bonds or whether to opt for cash redemption. Out of this, 21.5 lakh investors opted to remain with UTI as bondholders. They constitute corporates, individual investors and banks.
UTI chairman M Damodaran was unavailable for comments.
Meanwhile, UTI officials refused to divulge the details on how the Trust would raise Rs 1,700 crore as on May 31. Sources said that the chances of direct budgetary support from the government were quite unlikely since UTI had lines of credit commitments from nationalised banks to meet the US-64 shortfall against a sovereign guarantee issued by the Centre.
‘‘We still expect some amount of selling on those stocks where US-64 has large holdings, although this may not be substantial to ignite selling pressure,’’ the fund manager added.