In a marked shift from its current policy of holding all investments till maturity, the EPFO has sought approval to trade and exit investments.
The proposals are a part of the revised agenda that the EPFOs apex decision making body the Central Board of Trustees (CBT) will take up in its meetingon Monday.
Investments in all holdings that do not conform to the existing investment guidelines should be exited, the EPFO has said, further proposing that trading should be allowed in all such transactions which can result in a profit to the EPFO on the basis of assured and matching purchase and sale calls available in the market.
It is proposed that the Finance and Investment Committee of the CBT may go into various aspects of benefits and associated risks of trading and evolve comprehensive guidelines, said the revised agenda, a copy of which is with The Indian Express.
The proposal is a part of the EPFOs switch to the new investment pattern of 2008 that is yet to be approved by the CBT.The retirement fund manager has also suggested that it should not invest in state government guaranteed bonds and instead put in more funds in Central and state government paper.
It has mooted removing internal limits in state development loans (SDL) and central government securities (CTG) when it fully adopts the 2008 investment pattern.
Subject to market forecast, the endeavour should be to invest in long term government securities in order to maintain a healthy asset-liability ratio, said the revised agenda.
Under the 2008 investment pattern, that has to be approved by the CBT, the EPFO can invest up to 55 per cent of its corpus in central and state government securities including SDL and CTG.
At present, the EPFO, with a corpus of over Rs 5.46 lakh crore is the only investor that holds government paper till maturity and is also one of the largest investors in state government guaranteed bonds apart from the Life Insurance Corporation of India and commercial banks.
The move away from state government backed securities is likely because of high default risks and low returns. But the option to trade will have a huge impact on government paper and the bond market as a whole as the EPFO is not only one of the largest investors but also the only investor that holds government security till maturity, said Amit Gopal, senior vice-president, India Life Capital, an investment and legal consulting firm in retirement benefits.
Market borrowings are one of the main sources of financing for state governments. Typically, state governments give guarantees for bonds issued by state level public utilities and special purpose vehicles, state PSUs. According to RBI data, state level market borrowings stood at Rs 1.88 lakh crore in 2012-13.
Although the EPFO notified the new investment pattern last year, it had instructed its fund managers to continue with the internal limits of 25 per cent for central government securities and 15 per cent for state government paper will continue until approved by the CBT.
Gopal said if the proposal is cleared an enabling provision may also need to be included in the EPF scheme to permit exempt PF trusts to do the same. Cumulatively, the EPFO and exempt PF trusts have a corpus of Rs 7 lakh crore.
Additionally, as part of the changes in the investment pattern of 2008, the EPFO has also proposed that it should be allowed to invest 15 per cent of its corpus in private sector bonds and another 55 per cent in paper floated by public sector companies.