Around 83 per cent of US-64 holders of the Unit Trust of India have opted for the 6.75 per cent tax-free bond option.

The balance have put in a request for redemption, according to a senior UTI Mutual fund UTIMF) executive, who manages the scheme.

This would mean units amounting over Rs 10,000 crore (Rs 100 billion) are being converting into bonds.

The bonds would be sent to US-64 investors by the end of this month, UTI officials said.

Meanwhile, the mutual fund giant's actual cash outgo has been pegged at Rs 1,700-2,000 crore (Rs 17-20 billion), almost one-third of the total Rs 6,500 crore (Rs 65 billion) bailout package when units would be redeemed in May.

"The cash redemption will not be much and is likely to be in the region of Rs 1,700-2,000 crore," a senior UTIMF official said. The government has already provided for Rs 6,500 crore in the Budget for 2003 for meeting US-64 redemptions.

This includes Rs 3,000 crore (Rs 30 billion) as cash and the remaining Rs 3,500 crore (Rs 35 billion) as securities.

The bond option was in addition to the assured repurchase scheme offered to US-64 unit-holders.

All investors holding units up to 5,000 units would be offered Rs 12 in May. For all additional holdings, unit holders 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.

The bonds will mature on May 31, 2008. Currently, 26 lakh investors hold less than 5,000 units. The total capital of US-64 stood at Rs 10,590 crore (Rs billion).

Small investors held 4,512 million units, they said, the balance being held by large unitholders.

UTIMF officials said point out that most corporates and institutional investors have preferred bonds, which would be offered in exchange of the units.

"The effective yield on the bonds is more than that of government securities. Moreover, it has a sovereign guarantee. Most of the corporates and financial institutions are likely to lap it up," he added.

The effective return on the bonds works out to 10.52 per cent for companies and financial institutions, after adjusting for corporate tax at 35 per cent and a surcharge of 2.5 per cent.

In the case of high-income group in the 30 per cent tax bracket, the effective yield works out to 10.07 per cent. The effective return would be around 8.5 per cent while for those paying taxes at the rate of 10 per cent; the return would be 7.5 per cent.