The Finance and Investment Committee (FIC) of the Employees? Provident Fund Organisation (EPFO) may have deferred taking a call on the new investment pattern for provident funds notified by the finance ministry in August 2008 — which allows 15% investment in equities—but it has given its nod to increase the investment limit in bonds of AAA-rated public sector undertakings to 40% of their net worth, from the current limit of 25%.
The move to increase the exposure limit to bonds issued by PSUs and public financial institutions (PFIs) was proposed by the EPFO?s consultant Crisil, which is evaluating the performance of the new fund managers appointed in September 2008. The fund managers ? Reliance Capital AMC, ICICI Prudential AMC and HSBC AMC ? are learnt to have sought more headroom to invest in such bonds as the current norms are too restrictive.
The existing norms mandate the EPFO to invest a minimum of 30% and a maximum of 60% retirement funds in specified securities of PSUs. However, the exposure is limited to a maximum of 25% of net worth of the company or financial institution and 30% of net worth for banks.
In a meeting held last week, FIC was told that such caps on investment hinder the capability of fund mangers to earn higher returns by subscribing to securities of firms like Export-Import Bank of India, National Bank for Agricultural and Rural Development (NABARD), Rural Electrification Corporation (REC) and Power Finance Corporation (PFC). ?EPFO is not in a position to subscribe to their issuances, however attractive the returns may be, because the limit has already been exhausted,? the panel was told.
The problem of finding safe avenues to store employees? retirement money is even more acute at the EPFO, as permitted investment categories are limited and inflows are rising. In 2007-08, three of EPFO?s schemes ? Employees? Provident Fund, Employees Pension Scheme and the Employees? Deposit Linked Insurance scheme ? received Rs 30,900 crore in contributions, 25% higher than the Rs 24,870 crore in 2006-07.
However, there was no corresponding increase in options to park such funds, especially in PSUs and public financial institutions, as not too many issuers were eligible for investment under EPFO norms. PFI and PSU bonds constitute the highest yield generating category for the retirement kitty, as they generally pay higher interest than government securities.
The 25% net worth limit in place prevents EPFO from making fresh investments in the most frequent fund raisers like PFC, REC and Nabard. Though the net worth of these companies is growing as their reserves increase along with undistributed profits, the leeway this growth offers is not enough to absorb EPFO?s growing inflows.
The EPFO was pushing for raising the net worth limit to 50% from 25%, but the committee, which includes employee and employer representatives, agreed to raise it to 40%. The panel has kept the exposure limit at 30% in case of below-AAA public sector bank and 25% for public sector undertakings and other financial institutions. However, the decision will be taken by EPFO?s Central Board of Trustees.
In order to address the issue, the committee considered the investment pattern suggested by the Insurance Regulatory and Development Authority (IRDA). Insurance companies follow the exposure limit of lowest of 10% of capital employed of the issuer of securities or maximum or 60% of its net worth for investment in bonds. However, it rejected ?capital employed? as the basis for investment, saying the term also includes debt and a higher debt would increase exposure in the issuing firm.
The new pattern mooted by the finance ministry was notified by the Central Board of Direct Taxes earlier this month, so that retirement fund trusts that agree with it can start implementing it from April 1, 2009. It allows investments up to 55% in central and state government securities, up to 40% in corporate bonds of at least three years tenure, up to 5% in money market instruments and up to 15% in stocks.
