New Delhi: The board of Employees Provident Fund Organization (EPFO) approved a proposal to allow the retirement fund manager to invest in certificates of deposit of state-run banks and some other debt instruments to improve the yield for its more than 50 million subscribers.
It also approved Reliance Capital Asset Management Ltd’s 26% stake sale to Nippon Life Insurance.
The central board of trustees (CBT), the highest decision making body of the EPFO, approved the proposal to invest in certificates of deposit (CDs) sold by state-controlled banks, use collateral and borrowing lending obligation (CBLO) issued by Clearing Corporation of India Ltd, and invest in fixed deposits (FDs) of government banks for up to five years.
“It was approved by the board to increase the earnings from the investment,” said R.C. Misra, central provident fund commissioner. The finance ministry has to approve the decision.
Labour minister Mallikarjun Kharge said after the CBT meeting in New Delhi that the decision was aimed at improving yield without taking much risk. So far, the pension fund was not allowed to invest in CDs and could invest in only those fixed deposits of less than one-year tenure.
The use of CBLO, where loans are backed by government securities, will help the retirement corpus deploy or borrow funds to meet its requirement in ultra short-term tenures like seven days.
CDs are similar to bank term deposits but unlike traditional time deposits these are freely tradable and normally give better returns than bank FDs, said the EPFO agenda document.
Bhupendra Meel, vice-president of retirement trust solutions at A.K. Capital Services Ltd, said that the step is a positive move as it will give the fund mangers of EPFO the option to invest in short-term debt for better yield and wait for the right time to lock in money for a longer period.
“The change in investment scope in EPFO is happening for the first time in nine years. It was a requirement in a changed market condition and the move is a positive one,” Meel said.
EPFO has a corpus of more than Rs 3.3 trillion. Last fiscal year, EPF subscribers earned an interest of 8.25%, the lowest since 2006-07. The rate has not been fixed this year.
The charter of the EPFO requires Reliance Asset management to seek the board of trustee’s approval for any stake sale or purchase, since it manages part of the retirement fund’s corpus.
“The board has approved the proposal keeping in view the fact that (there was) no restriction at the time of bid on the quantum of foreign investment. It’s not affecting the company or its structure in any manner,” said Misra.
CBT deferred a proposal to allow investments in non state-owned companies. According to the current mandate, the EPFO can only invest in seven entities—HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd, LIC Housing Finance Ltd, IL&FS Ltd, IDFC Ltd and HDFC Ltd.
“That part has been deferred as more study is required to consider the proposal,” said Misra.
J.P. Chowdhary, chairman of Titagarh Wagons Ltd and a member of the CBT, said the board thought that the decision taken on Tuesday will increase investment options for improving the earnings of the fund without compromising on safety.
However, Gautam Bhardwaj, a director at Invest India Economic Foundation, said EPFO needs to ask itself what its core objective is. “If the objective is to give optimum retirement income (to its customers), then do they have any reason for existence,” he said.
If EPFO thinks investing in equities is a problem because of volatility then “it’s a product design issue,” Bhardwaj said. “They have to update themselves and form rules (for) 2012 than 1952.”