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Bailout throws up multiple options

N Mahalakshmi in Mumbai

The government's Rs 14,561 crore (Rs 145.61 billion) bailout package for US-64 and all assured-return schemes comes as a relief for investors.

However, there is no compelling case for investors to refrain from redemptions in US-64.

The bailout package includes extending the commitments made by US-64 to perpetuity and meeting all shortfalls on assured-return schemes. This means investors holding up to 5,000 units will continue to get Rs 12 per unit. Anything in excess of 5,000 units will fetch Rs 10 per unit.

Here, the government is weighing two options: The first scenario is that in May 2003, all investors in US-64 will be brought on a par by an issue of additional units based on their entitlement.

For instance, if an investor holds 3,000 units, he will be entitled to get Rs 12 per unit in May. And if the net asset value of the scheme is Rs 6 at that time, the investor will get 3,000 units more.

So, he can either choose to remain with the scheme with the fund with his 6,000 units, or encash completely.

The second scenario is that US-64 will be spilt into two schemes: one with investors who are entitled to assured returns and the other with investors who entered the scheme based on NAV prices.

In the first scenario, US-64 will operate like any other balanced fund after May 2003 and the fund, as also unitholders, will be subject to market risks. The investor could even lose money if the NAV goes below Rs 6. So, investors with an assured-return mindset will have to keep out of the scheme.

In the second scenario, it will make sense for investors with assured-return entitlement to pull out their money in May 2003 because the assured amount per unit will be constant after May 2003. So for investors staying beyond that, it will be an opportunity loss.

In the case of monthly income plans where there is assurance of return for the entire term of the scheme, investors can stay put. In the case of others (capital guaranteed at maturity with divided reset option), dividend may be revised downwards if investment performance is not up to the mark.

But investors will be better-off staying with the scheme if the NAV is below par, as capital is not guaranteed on premature withdrawals.

Tax-relief measures for US 64 in the form of tax-free dividends and lower capital gains tax may not be enough to retain investors in US-64 for two reasons.

First, US 64 may not be in a position to declare significant gains unless it sees a spectacular run, which looks unlikely. Secondly, the possibility of capital gains in US-64 for the exiting investors is rather low.

However, tax sops in the form of eligibility for Section 88 benefits or Section 54EA/EB may cause new investors to take a relook at the scheme.

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