According to the plan drawn up, in return for subscription in US-64 from banks, the trust will purchase bonds issued by public-sector banks, which will carry a fixed coupon. By subscription to the bonds, the trust will enhance its stream of debt income, which will help align the sale/repurchase price in line with the scheme's net asset value over the long term. In addition, the composition of the profile will get corrected. The ministry feels that the profile of US-64, which is now skewed in favour of equity, needs to be corrected. This stems from the thinking that the scheme is meant to be an income plan and not a growth avenue.

The ministry viewsthe plan to infuse funds through banks as a win-win idea, particularly because there is no cash outgo from the system. It is unlikely to be detrimental to banks as they are now facing a problem of acquiring good assets.

The bond recapitalisation plan will bridge the gap between the net asset value and the sale/repurchase price of the scheme. Now with the net asset value ruling below the sale/repurchase price, the new investor is essentially allowing earlier investors to exit from the scheme at a higher price. By keeping the sale/repurchase price over the net asset value, new investors are being overcharged. Should the redemption pressure mount, the trust may have no option but to sell corporate and government debt paper.

This will exert a downward pressure on the price of debt instruments, which, in turn, will have a serious repercussion on banks' portfolios, which hold large volumes of government securities. Hence the debt market must be walled in, the ministry feels.

The other option before the trustis to start selling blue-chips. If this is done in large volumes, it will impact the stock markets adversely, which will have political repercussions. The ministry wants to prevent this as it `can have serious repercussions for the market, affecting sentiment for a long time'. The ministry feels that both the government securities market and the equity market will be insulated through the swap deal.

INSIGHT
A win-win formula
The proposal will serve three worthwhile objectives. With the acquisition of bank bonds, US-64 will have a larger proportion of debt in its investment portfolio. This will reduce the volatility of its income arising from over investments in equities. Correspondingly, US-64 will not have to sell equity in a big way to cover the outgo on repurchases. This will help the secondary markets. Last, heavy bank investment in US-64 will boost the confidence of individual unit-holders.