The restructuring exercise of the beleaguered scheme will be based on the Deepak Parekh committee recommendations. The measure is aimed at reducing the dependence of the scheme on equity and increasing its exposure to assured income simultaneously.

The committee has basically recommended the need for a readjustment of asset allocation in US-64 coupled with entry and exit options for investors at NAV-related prices in a time frame of three years. Before kicking off this major restructuring, the government has decided to provide the cushioning in the form of the special fund.

The ball will start rolling with UTI setting up a special fund, called Special Unit Scheme '99 (SUS '99). The PSU holdings of US '64 will be transferred to SUS '99 at book value whichwill fetch a sum of Rs 4800 crore. US-64 will be paid the transfer consideration through issue of Government of India securities. In what transpires to be a string of book-entries, the debt exposure of US-64 will go up by Rs 4,800 crore.The government expects the NAV of US-64 to improve through this cushioning. Besides, the fears of continuing sale of equity by US-64 will abate and could contribute to buoyance of the stock market.

When the news of US '64 reserves turning negative broke out in September last year, the UTI top brass had maintained that the scheme was not a NAV-driven product. However, in the aftermath of the reserves turning negative, the scheme saw a net outflow of Rs 1,500 crore in just three months ended December 31, 1998.

Units of SUS '99 worth Rs 4810 crore will be bought by the government which will pay in form of government securities and not cash.SUS '99, in turn, will buy the PSU portfolio of US '64 (worth Rs 4810 crore) by paying in from of government securities.

The tenure ofGoI securities issued to SUS '99 and the securities issued by SUS '99 to US '64 will be almost identical. The tenure of GoI securities is likely to be five years with a coupon rate comparable to those of similar instruments floated by the government.

The committee has indicated that a pro-active management of US '64 portfolio can provide a stable income to US '64. Absence of a pro-active management has been the major reason for the mess that US '64 has landed into.The restructuring coupled with tax incentives is basically aimed at shoring up the confidence of investors in US-64. The finance minister has exempt from income tax all income from UTI and other mutual funds received in the hands of the investors. This will not only reduce the incidence of tax, but will eliminate the inconvenience faced by small investors in paying tax and claiming refund in connection with income derived from such investments.Presently if the income in the hands of the investors is fully exempt from tax. This income is subjectedto dividend tax under section 115 (O) of the income tax act, at the stage of distribution of the dividend by UTI or mutual funds.

The exemption has been granted for 3 years for US-64 scheme as also for all open-ended equity-oriented schemes of UTI and mutual funds-with more than 50 per cent investment in equity-from dividend tax. However, income distributed by mutual funds, where the equity investment is less than 50 per cent, will become subject to the 10 per cent dividend tax.