The Centre has finalised its budgetary support for the Unit Trust of India for 2003-04.
The support includes upfront cash payment of about Rs 6,500 crore (Rs 65 billion) to UTI for its flagship scheme US-64 and cash-neutral assistance of about Rs 2,700 crore (Rs 27 billion) on its various assured-return schemes which mature in the next financial year.
According to senior finance ministry officials, the estimated difference between the net asset value of US-64 as on October 28, 2002, and its assured repurchase price up to May 2003 is Rs 6,571 crore (Rs 65.71 billion).
Keeping in mind that US-64 subscribers are largely small investors, the finance ministry has decided to provide upfront cash to UTI for meeting its commitment.
The finance ministry had initially considered issuing secondary market tradable bonds to the trust to enable it to raise funds to meet US-64 redemptions in May next year.
Under this option, the Centre would not have had to shell out a huge sum next year itself.
It has, however, now decided to provide cash to fill the gap between the prevalent NAV and assured repurchase price.
Officials said about half-a-dozen assured-return schemes of UTI would mature in the next financial year.
These include USFUS 98, MIP 98 (II), MIP 98 (III), MIP 98 (IV), NRI Fund and USFIS 98 (II) which mature between May 2003 and December 2003. The UTI had projected the shortfall on these six schemes at Rs 2,700 crore as on October 29.
The estimated liability of Rs 2,700 crore on account of the shortfall in the assured-return schemes of UTI will be taken by the government by issuing bonds to UTI.
Officials, however, said the liabilities on assured-return schemes would be supported by the government only when they arise.
To ensure cash neutrality, officials said the government would enter into a two-way simultaneous transaction with UTI.
It will give UTI the funds required to meet its liabilities, which UTI will immediately use to subscribe to the government bonds.
The interest rate on the bonds would be akin to the yield on government securities of a similar tenure, officials said.