A proposed amendment to the Government Savings Banks Act, 1873, will bar trusts from investing in small savings instruments and leave the investment avenue open only for individual investors. The amendment has been included in the Finance Bill, 2005.

A committee on small savings had also recommended the change in the definition of depositors to be confined to an "individual" instead of a "person" as mentioned in the law. The restriction was already applicable to companies.

Officials said the intention was not to include trusts in the definition of depositors but a court order interpreted "persons" to include juridical person and the amendment would restrict the definition to individuals.

This move will mean that trusts, which were earning higher returns through investments in small savings instruments, will no longer be able to park funds in these high-return instruments.

They will, however, be allowed to invest in select bonds and other instruments not covered by the  Government Savings Bank Act.

Schemes like those of the postal department provide higher returns than market rates, which the government has to fund. According to industry sources, these schemes could be attracting investments from large investors who manage investments through trusts.

Also, the denial of the small savings avenue could result in a flow of funds into the equity markets.

While estimates of investments by trusts were not available, officials said the Centre would, with this move, be able to target the schemes better at individuals.

At present, the Centre passes on the small savings mop-up on a back-to-back basis to states. The net amount, the differnce between the gross collections and repayments, was earlier shared between the Centre and the states in the form of long-term loans for financing the state Plans.

As per the government's preliminary data for 2003-04, the gross deposits grew 27.5 per cent to Rs 1,34,778 crore (Rs 1,347.78 billion), while the net amount was an estimated 19.5 per cent higher at Rs 60,872 crore (Rs 608.72 billion).

During 2003-04, West Bengal with Rs 17,532 crore (Rs 175.32 billion) gross deposits topped among states in terms of gross deposits followed by Maharashtra at Rs 15,093 crore (Rs 150.93 billion).

The upshot Trusts, which are earning higher returns through investments in small savings instruments, will no longer be able to park funds in these high-return instruments They will, however, be allowed to invest in select bonds and other instruments not covered by the Government Savings Bank Act Also, the denial of the small savings avenue could result in a flow of funds into the equity markets