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The Indian government announced Saturday a 145-billion rupee (three-billion dollar) bailout package for the cash-strapped Unit Trust of India (UTI), the country's largest mutual fund, to enable it to repay investors in assured return schemes.

The decision was taken at a meeting of the cabinet committee on economic affairs, chaired by Prime Minister Atal Behari Vajpayee in New Delhi, officials here said.

The committee estimated a shortfall of 85.61 billion rupees (1.74 billion dollars) on assured income schemes and 60 billion rupees (1.2 billion dollars) for the popular US64 scheme.

The US64 is the largest fund managed by the state-owned UTI.

Since the 145 billion rupees will be raised through the sale of bonds, it will not place a burden on India's widening fiscal deficit, announced Finance Minister Jaswant Singh.

The meeting also decided to split the trust into two companies, Singh added.

"UTI will be divided into two parts which includes old protected UTI comprising of US64... and assured return schemes, and new UTI-II comprising of all net asset value-based schemes... UTI-II will be disinvested," he said.

"We will be alert and as far as UTI-II is concerned, we will run it on professional lines," he said.

As investor confidence in UTI has been eroded, the government will consider tax concessions on the US64 to provide an incentive to unit holders to remain invested, the minister told reporters after the meeting.

The decisions taken Saturday are meant to protect pensioners and other small investors while making the trust run on professional lines, Singh added.

UTI, which manages a large proportion of India's mutual fund industry's assets valued at about 20 billion dollars, shocked thousands of small investors last July when it froze redemptions from its flagship US64 after being hit by redemption pressure following a stock market scam.

The suspension was later revoked by UTI, which offered limited redemption at an administered price.

Saturday's bailout was hailed by UTI as well as business lobbies which said the step would rejuvenate cash-starved privately-run and state-owned mutual funds, battered recently by a massive fall in investor confidence. UTI chairman M. Damodaran said it would help "meet investors' expectations, reinforce confidence in the largest fund manager and provide a positive trigger to stock markets."

"The comprehensive package shows the government's commitment to stand by the assurances given by UTI to its investors," Damodaran added.

Indian Association of Mutual Funds chairman A. Kurien said: "The package has addressed immediate worries of investors who had reposed faith in UTI, specially senior citizens who had invested their life savings in assured schemes."

K.N. Nohria, president of the Association of Chambers of Commerce, said the bailout would boost markets.

"The action will re-instill investor confidence without whose support it would be difficult to revive the capital market," he said.

"In fact, the base of US64 was so used that any repercussions good or bad will have implications on other schemes," he said in a statement.

The Punjab and Haryana Chamber of Commerce and Industries too welcomed the bailout.

"The government should put in place suitable mechanisms to ensure that such a situation does not arise again," forum president Arun Kapoor said in a statement.

"It will now help improve UTI's image in times to come," Kapoor added.

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