Recent attempts to revamp the Employees' Provident Fund Organisation's (EPFO) investment pattern with a gradual shift to riskier, higher-yielding instruments have run into hurdles.
Recent attempts to revamp the Employees’ Provident Fund Organisation’s (EPFO) investment pattern with a gradual shift to riskier, higher-yielding instruments have run into hurdles. While whatever measly sum the EPFO has invested in the stock market since August has yielded an annualised return of just 1.5%, causing the trade unions to say “I told you so”, the retirement body has now said it would fall way short of the newly-prescribed limit of mandatory exposure to corporate credits due to a dearth of such instruments that yield returns higher than even state government securities.
FE has learnt that the EPFO has sought the finance ministry’s permission to tweak the new investment pattern for the current fiscal to allow up to 100% exposure in favour of state development loans (SDLs) or government securities from the current limit of 45-50%.
As per the formula notified by the labour ministry on April 23 this year, EPFO will invest a minimum of 35% and a maximum of 45% of fresh accretion, estimated at R1,15,000 crore, in corporate credits.
However, in the first five months of the current fiscal, the EPFO has so far been able to invest only R7,600 crore in corporate credits — both public sector as well as private — including investment in bank-term deposits. This leaves another R32,650-44,150 crore additional investment to be made in the remaining seven months to comply with the prescribed norm.
“During the financial year, there has been a serious mismatch in the demand and supply of corporate credits. The attainment of the (prescribed) percentage of investment appears to be very difficult, rather, the same may not be possible without compromising on the rate of return on the investments made by EPFO,” reads the agenda note of the EPFO trustees’ recent meeting. “It is against common sense of investment to make investment in corporate credits having lower security and lower rate of interest as against SDLs having both higher interest and higher security in the prevailing market conditions,” it added.Analysts, however, said the contingency of initial exchange-traded funds returns being low—these investments are meant to be long-term—or a transient demand-supply mismatch in the corporate debt securities market should not be a reason for changing the new investment formula and returning to the conventional pattern.
“We hope that the ministry of finance will agree to higher percentage of investment in government securities or SDLs for this financial year,” said a senior EPFO official. However, he added that higher allocation to G-Secs/SDLs would be made particularly if the rate of AAA corporate credit of PSUs remain below the SDL rates.
As per the latest norms, besides investing 35-45% in corporate credits, the EPFO will invest 45-50% of its incremental deposits in government securities and related investment and another up to 5% into money market instruments. Prior to the change, the EPFO was required to investment up to 40% in corporate debt securities and term deposit of banks.
The rate of interest on the corporate credits has gone down considerably. In fact, for the last one month, SDLs issued by various state governments that are secured through the mechanism of automatic debt by the Reserve Bank of India have been fetching a higher rate of return compared with corporate credits.
The EPFO’s idea of pruning exposure to corporate credits first came up in the August 21 meeting with the portfolio managers where it was decided that for the current fiscal, investments in SDLs may be permitted beyond the maximum percentage prescribed in the pattern of investment. The proposal was discussed threadbare in the meeting of the central board of trustees on August 26 where it was decided that a proposal should be made to the department of financial services, ministry of finance, to allow investment in government securities and SDLs up to 100%.
Meanwhile, the Finance, Investment and Audit Committee of the EPFO in its meeting held in April last year had allowed investment in private corporate credits having a minimum of dual AA+ rating.
The issue has been referred to an expert committee headed by Arun Kaul, which is yet to submit its report. However, as the final report is pending, the EPFO has proposed to invest in bonds and term deposits of dual AA+ private schedule commercial banks with certain conditions.