Sources here said US-64 should offer a lower but tax-free dividend to all institutional investors as a variant of what was done from 1964 (when the scheme was born) to 1992.

US-64's promoters used to get a lower rate of dividend than other investors up to the early nineties, when SA Dave took over as chairman and mandated a uniform rate.

The lower rate of tax-free dividend for institutional investors -- including corporates -- will not only shore up the net asset value but also make its pricing more realistic, observers feel.

By lowering dividend for institutional investors to say 14 per cent, UTI can straightaway save 35 per cent on the Rs 1600 crore it paid out in 1997-98 under US-64. The total outgo on the 20 per cent dividend on US-64 was about Rs 3200 crore.Around half the corpus of Rs 22,000 crore came from institutional investors including corporates.

The savings in dividend translate into a higher NAV and brings it closer to the current price of units and helps restore investor confidence. Since lowering the sale price would send wrong signals to the market, any mechanism which improves NAV ought to be welcomed, say observers.

As far as the institutional investors are concerned, a lower tax-free dividend of 14 per cent would still yield around 10 per cent per annum which is considered good because US-64 is by far still the most liquid instrument for corporates. The loss to the exchequer is only 30 per cent on Rs 1600 crore which works out to Rs 480 crore.

Assuming that the dividend is lowered to 14 per cent, a corporate investor will get Rs 1.40 by way of dividend on a sale price of say Rs 14 in July 1998. The annualised yield then works out to 10 per cent. This coupled with liquidity would be just enough to retain the interest of corporates.

Thechief executive of a cement company said tax exemption on dividends would definitely make him reconsider an entry into US-64. Incidentally, his company had a Rs 50 crore investment in US-64 which it liquidated in 1995-96.

By retaining the dividend for retail investors under US-64, the government would ensure that retail interest does not flag as their interests would be protected. Currently, the yield on 20 per cent dividend works out to 14.28 per cent.

The US-64 scheme became unattractive for corporates when the Section 80M benefit was withdrawn in 1994, as they used the scheme for their treasury operations. To attract the corporates again, UTI launched US-95 exclusively for them. But the US-95 scheme has failed to catch the corporates' fancy judging from the poor sales under the scheme in 1996-97. Compared with Rs 48-crore sales in 1995-96, its sales in the following year dropped to only Rs 0.36 crore. As on June 30, 1997, its unit capital was only Rs 121.27 crore.

The `initial' days

For along period in the past, UTI had declared a lower dividend on the initial capital of US-64, differentiating it from "unit capital".

Initial capital is the contribution of the original promoters -- Reserve Bank of India, Life Insurance Corporation, State Bank of India, other scheduled commercial banks and financial institutions. When the scheme was launched in 1964, the Reserve Bank of India chipped in with Rs 2.5 crore, Life Insurance Corporation with Rs 0.75 crore, State Bank of India and associates Rs 0.75 crore and IFCI, ICICI and others with the rest. In 1976, the Reserve Bank of India's stake was transferred to Industrial Development Bank of India.

For example, in its first year the dividend on initial capital was three per cent and that on unit capital 6.1 per cent. In 1965-66, dividend on initial capital was 4.25 per cent and that on unit capital seven per cent.

The difference between the two was around three percentage points.

The practice of paying lower dividends on initial capital continuedtill 1992-93 before Dave took over and decided that dividends on initial and unit capital would be uniform, UTI sources confirmed.