US-64 faces redemption hurdle: 50% bonds in physical form

Of the Rs 8,000 crore that SUUTI must pay back to bondholders, Rs 4,000 crore worth of bonds are held by 1,800 institutions comprising trusts, charitable institutions and banks.

Bonds worth about Rs 3,300 crore are held by institutions and retail investors in dematerialised form or demat, which will be redeemed automatically. In fact, the redemption process, which is the biggest ever in India, has already begun for bonds worth Rs 700 crore that are held in demat form by institutions.

But it is the bonds in physical form that are upsetting SUUTI's calculations. "It is possible that addresses have changed and we do not want to take the risk of sending cheques to the wrong address. We are trying our best to contact as many investors as possible," said a senior executive familiar with the issue.

Some investors still think that US-64 will continue, the executive added. "We may wait for one more month after the redemption date. Then the government will have to take a call on what to do with the bonds that have not been redeemed."

A source said the SUUTI management and the government, which had extended cash support and guarantees to help the entity tide over a cash crunch at the start of the decade, will have to set aside funds to ensure that bondholders who do not seek redemption now are paid later.

Investors holding up to 200 bonds do not need to surrender their bond certificates as the proceeds will be directly credited to their accounts.

Others were asked to submit the certificates before May 25 though those who missed the deadline can still surrender the bonds and get their money back.

These bonds were trading on the National Stock Exchange till April 23.

US-64 bonds were issued to investors in 2003 in lieu of units held in Unit Scheme '64, the country's first mutual fund scheme, after UTI crumbled under the burden of assured returns schemes.

As part of a restructuring of UTI, which was split into SUUTI and UTI mutual fund, redemption in the scheme was suspended and investments were converted into a five-year bonds carrying 6.75 per cent interest.

Following the restructuring, a large number of UTI schemes were transferred to UTI Asset Management Company (AMC). UTI AMC had sent out mailers to investors recommending some of its schemes and has received over 100,000 requests from bondholders who want to convert to UTI AMC schemes.

Some other mutual funds such as SBI Mutual Fund, Reliance Mutual Fund, DSP Merrill Lynch Mutual Fund and Sundaram BNP Paribas Mutual Fund are actively trying to position their products to target the US-64 money. In fact, SBI Mutual Fund has already invited US-64 bond holders to invest in one of its schemes, Magnum Balanced Fund, which invests in both bonds and stocks.