The Unit Trust of India has kicked off negotiations with a string of public sector banks for a possible line of credit to meet any unforeseen redemption pressure arising on account of US-64 units in May.

US-64 in its present form will be terminated with effect from June 1.

The finance ministry has given the US-64 investors an option to convert their holdings into 6.75 per cent tax-free secondary market tradable bonds.

Investors can exercise the bond option between March 15 and April 4.

The bond option is in addition to the assured repurchase scheme offered to US-64 unit-holders. All investors holding up to 5,000 units would be offered Rs 12 in May. Additional holdings would be offered Rs 10 per unit.

The scheme will cover all US-64 units issued on or before June 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, 2003.

UTI is putting in place a line of credit from banks in case the investors want to redeem their units and not opt for the bonds.

The bank loan will be raised on pledge of securities. UTI had earlier raised bank loans in similar fashion to meet the redemption pressure.

"We are willing to give loans as for us this is a commercial proposition. As long as we get securities as pledge, there is no problem in extending a line of credit," said the chairman of a large public sector bank.

M Damodaran, administrator for UTI-I, had earlier said that UTI-I would not sell securities in today's depressed market to face redemption pressure.

"The government is supporting the scheme and there is no need to offload the US-64 portfolio in the market," he had pointed out.

Analysts said there may not be a huge redemption pressure and UTI is arranging the line of credit as a matter of precaution to meet any eventuality.

"There is no restriction on the class of investors and no ceiling on investment in the tax-free bonds. Besides, they will be tradable in the market. They are expected to command a premium," said an analyst.

According to finance ministry officials, 26 lakh (2.6 million) investors hold less than 5,000 units.