In reply to our questionnaire on the new listings on the Over-the Counter Exchange of India (OTCEI), the exchange sent details of two units from the Unit Trust of India. On scrutiny, we found that the units were listed in September, albeit without any trade. However, with falling interest rates, these two units belonging to the close-end family with assured returns will be of interest to investors.

Unit Trust listed its Rs 675.37 crore Institutional Investors' Special Fund Unit Scheme 1997 (IISFU '97) on OTCEI on September 23, 1997. According to the exchange, however, the IISFU '97 units, having a face value of Rs 10 each that were hawked in the market between April 15 and May 29, will be ready for trade only around mid-November. In its offer document the Unit Trust of India had promised that the unit certificates, in lots of 50,000 units each, would be listed on OTCEI "within six months from the date of commencement of the scheme" (i.e. July 1).

The close-ended income scheme for institutional investors seeking tax shelter and redeemable after five years on June 30, 2002, has an assured dividend of 15 per cent payable annually. According to the stated investment objectives, not more than 20 per cent of the corpus will be invested in equity and related investments, while the balance will be invested in fixed-income securities like money market instruments. Since the scheme was floated in April 1997, there has been a marked downfall in interest rates, resulting in substantial downward revision in the expected returns on rated debt instruments.

For instance, while the scheme postulated that an average yield of 18 per cent per annum may be obtainable on debentures, currently AAA-rated debentures provide an yield-to-maturity of only 15 per cent per annum.

Under the circumstances, UTI may find it very difficult to achieve enough income, after providing for annual expenses, so as to be able to meet its commitment of an assured 15 per cent pay-out. However, as there is a safety net in the form of a `Development Reserve Fund' in the event of a shortfall in the generation of distributable income, there is no immediate cause for worry. The listing on OTCEI is expected to provide institutional investors with an easy exit route.

Looking at the character of the instrument (akin to a fixed-income security with a coupon of 15 per cent per annum) and assuming the expected rate of return in the market from alternative investments to be 14 per cent or below, the first trade can command a premium of about 5 to 6 per cent to its par value. But looking at the depressed quotes under the mutual fund segment, there is also room for pessimism. However, institutional investors will be able to enjoy the benefits of the net asset value ( NAV) related exit route after the Unit Trust of India commences repurchase of the units under the scheme on July 1 2000. Besides, as most of investors have invested their funds for capital gains tax exemption under Section 54 EA of the Income Tax Act, 1961, they may not grumble.

The second unit is UTI's five-year Monthly Income Plan 1997 (MIP '97), a close-ended scheme launched in February 1997. The units, having a face value of Rs 10 each, were listed on OTCEI on September 10, 1997. Although it is ready for trade, MIP '97 has still not recorded any quote on OTCEI. UTI has assured a dividend of 14 per cent per annum payable monthly for all the five years of the scheme. Unlike the IISFU scheme, where UTI has categorically stated that it will meet any shortfall in the assured return through the Development Reserve Fund of the around Rs 57,000 crore, in MIP '97, there is no such clear assertion by the Unit Trust of India. This is probably because the investor-profile is different -- MIP '97 focuses on individual investors while IISFU '97 is meant for institutional investors. One only hopes that the Unit Trust of India does not reach a situation wherein its loyal investors are left high and dry for their failure to read and comprehend legal fine-print. However, there is no excessive cause for alarm as one of objectives of the Development Reserve Fund is to meet any shortfall in the assured rate of return of any UTI scheme.

The assured return (14 per cent per annum payable monthly) translates into a return of 14.93 per cent per annum payable annually. If one adds a one per cent annual expenses charge, UTI must necessarily earn 15.93 per cent or 16 per cent per annum to meet its commitments. Given the fact that this scheme is income-oriented (at least 80 per cent of the funds will be invested in fixed-income securities), UTI's ability to generate the requisite rate of return will be undoubtedly under strain, if the low-interest rates persist for too long.

Under the circumstances, the listing of the units may provide an exit route to doubting investors. Given the declining yield curve and the fact that this scheme is like a fixed coupon investment, it is likely that the units will get traded at a premium of about 5 per cent to the par value, so as to provide a yield of 14 per cent per annum. However, investors can expect to benefit from the NAV-driven repurchase by the Unit Trust of India, when it becomes operational on May 1, 2000.

For investors who had applied for these units seeking capital gains tax exemption under Section 54 EA of the Income Tax Act, 1961, the present listing is of no consequence as they have to cool their heels for three years.