After a gap of 17 years, the Employees’ Provident Fund Organisation (EPFO) may start investing again in securities guaranteed by state governments, as it has decided to review extant guidelines that have prevented such investments. However, the investment is proposed to be capped at 20% of about `2 trillion incremental annual accretion to the EPFO kitty from its 66 million active subscribers.
Earlier, the EPFO was permitted to invest in such papers as per its approved investment pattern. But the guidelines framed in 2005 capped investments “for the time being” in such asset classes under the “government securities” category in which the EPFO is authorised to invest 45-65% of its incremental accretion. It now wants Central Board of Trustees (CBT), its highest decision-making body, to lift the limit so that “adequate investments in higher yielding state government securities could also be made a part of EPFO portfolio”.
In a recent letter to members of the CBT, the EPFO said these restrictions which were placed in the investment manual “for the time being” haven’t been reviewed “in accordance with the changing circumstances of the fiscal and credit quality of the state finances as a consequence of the maturity in implementation of the FRBM Act, 2003, by the state”.
Though the proposal was part of the agenda for a meeting last month, CBT members did not take up the matter for discussion.
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The EPFO’s latest decision stems from the fact that it’s now more confident of getting back its investment from such securities, as the Centre has set the net borrowing ceiling (NBC) of the states, thus providing an implicit guarantee to such loans.
“Most critically, off-budget borrowings raised by state entities are now being equated with the state governments own debt, which enhances transparency of the state finances,” the EPFO said. Following the recommendations of the 15th finance commission, the central government has now decided that “borrowings by state public sector companies/corporations, SPVs and other equivalent instruments, where the principal and/or interest are to be serviced out of the state budgets and/or by assignment of taxes/cess or any other state’s revenue, shall be considered as borrowings made by the state itself”, it said in the letter.
The cumulative investment made under this sub-category of securities won’t be in excess of 10% of the total portfolio of the fund and not more than 20% of the incremental accretion, the Finance Investment and Audit Committee (FIAC), the advisory body of the retirement fund manager, has recommended. Investments in any individual issue needs to be capped at 50% of the total issue size, it added. As on March 2022, EPFO’s portfolio stood at `18.32 trillion.
If there arises any opportunity for investment, which is above 20% of the incremental accretion or above the 50% of the issue size in any state government guaranteed securities, the FIAC may be convened and special permission be sought so that any good investment opportunity is not lost.