The mutual fund monolith, which has a corpus of Rs 60,000 crore under its management, had earlier decided to dematerialise up to 50 per cent of its holdings in securities.

The decision to go up to 80 per cent was taken last week, said top UTI sources, keeping in mind the spurt in dematerialisation.

"It was felt that there is no reason to retain paper as even if we do not trade all our holdings even keeping shares in demat form have several advantages and is much more economical as well," said the source.

Despite the merits of keeping stocks in demat form, the trust has not gone up to the 100 per cent levelof dematerialisation as of now owing to two main reasons.

The first being cited by UTI officials is the lack of trading activity in the demat segment. While, institutions have been allowed to deliver demat shares in the physical segment, for buying demat shares they have to go to the demat segment of an exchange where the volumes are pathetic.

Institutions have to sell only demat shares but they can buy physical shares provided they subsequently dematerialise them. The reason for the low volumes in the demat segment are being attributed to the presence of diverse settlement cycles on the two segments. While a rolling settlement cycle is followed in the demat segment, the physical segment retains a weekly settlement cycle.

However, this does not seem to be too strong a reason for UTI's rejection of taking up demat holding to 100 per cent, as in any case it is allowed to buy physical shares and if it has to sell its holdings then it has to do so in the demat form only.

The real reason is somewhatdifferent. UTI finds itself in a bind as while on the one hand it has to protect the interests of the Stock Holding Corporation of India Ltd (SHCIL), a company promoted by the mutual fund, on the other it has to try and give the best possible returns to investors, and lowering the costs of holding shares (by dematerialising them) is one effective way of doing this.

With excessive dematerialisation, the earnings of SHCIL are going to take a severe beating and with UTI being its major client, if all the shares were to be dematerialised, SHCIL's fortunes would be that much more eroded.

Incidentally, UTI is also a co-promoter of the National Securities Depository Ltd (NSDL). Market watchers, however, point out that the trust has to seriously look at the amount of unit holder money it can save in the form of lower holding cost of demat shares.

SHCIL has become a depository participant with NSDL and is currently putting in place an ambitious plan to expand its investor base by opening several centres acrossthe country.