A dividend of Rs 1.50 per unit at the July invitation price of Rs 13.70 will translate into a yield of 10.94 per cent, which will be tax-free. However, for retail investors who do not fall in the tax net, including senior citizens, this could mean a sharp fall from the expected 16 to 18 per cent dividend.

But the move to pare dividend is seen as the next logical step towards restructuring of the beleagured scheme. Backed by the tax exemption and the Rs 4,800-crore package from the Government, UTI will be in a position to end the regime of artificial pricing and unrealistic dividend distribution. This is in line with the recommendations of the Deepak Parekh Committee.

According to sources, the yield on US-64 will be marginally more than the 10.75per cent tax-free return on UTI's latest Monthly Income Plan. This in itself is expected to ensure an inflow of around Rs 3,000 crore into US-64, if the MIP collections of Rs 2,700 crore are any indication. "A tax-free yield of over 10.75 per cent in the absence of another MIP scheme, would naturally attract corporates and high net worth individuals to US-64 when it reopens from July 3 for sale," points out a source.

Based on the 20 per cent dividend last year, the post-tax yield for investors in the top-tax bracket works out to 9.48 per cent on an entry price of Rs 13.70. "If high net worth investors will get a tax-free yield of over 10.75 per cent, they will surely come to US-64," the source said.

For the US-64, the `downward correction' in the dividend will mean managing distribution without bleeding the scheme. Assuming a 15 per cent dividend, the outgo on an unit capital of around Rs 13,500 crore would be around Rs 2,000 crore. This is against a dividend distribution of Rs 3,126 crore at Rs 2 perunit last year which translates into a direct saving of more than Rs 1,000 crore.

The reduction in the dividend also saves the UTI from offloading substantial quantity of bluechips in the market just when the key holdings of US-64 scheme have started recovering. The scope for booking profits from the market in the current year has been limited to the last couple of months.

"Maintaining dividend around last year's level will mean losing precious holding, just when the three-year drought in the bourses for the scheme's top holdings has ended. The rally is just beginning to pick up in the market and any arbitrary profit booking is not desirable at the current juncture," points out a source.