New Delhi: The labour ministry has moved to give a conditional nod to the long-pending proposal for a portion of the Employees’ Provident Fund (EPF) to be invested in the stock market.

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If accepted, it could see the injection of a substantial amount of liquidity into equities.

In a communication to the ministry of finance, which has repeatedly sought the go-ahead for earmarking up to 15% of the corpus for stock market investments, the labour ministry has indicated its willingness, provided there is a guaranteed “reasonable rate of return", a top government official close to the development said on condition of anonymity.

The labour ministry proposal, according to the same person, has the approval of the Central Board of Trustees (CBT), the apex advisory body of the Employees’ Provident Fund Organisation (EPFO), which had steadfastly opposed any move to liberalize investment norms.

The move came in response to a letter written by the finance ministry in August.

“EPF is poor man’s money. EPFO is the custodian of it. Though stock market investments can give a better return, there is possibility of losing the money. That’s why CBT has been opposing the finance ministry’s proposal," the official said.

The labour ministry has convinced CBT to start investing 5% of the total corpus of 3 trillion, provided the finance ministry guarantees a return. If the proposal falls into place, it will see an inflow of 15,000 crore into the equity market, the same person added.

G. Sanjeeva Reddy, all-India president of Indian National Trade Union Congress, who is also a member of the trust said: “There was a long discussion on investing in stock market. We categorically said that if share market investment is good for employees then 5% or 10% of the money can be invested but only if government gives capital protection assurance. The share market is volatile and employees’ hard-earned money cannot be risked without proper assurance."

However, some other trade union leaders were sceptical as to whether the finance ministry would give its nod to the proposal. Tapan Sen, secretary general of left-wing Centre of Indian Trade Unions, said: “I don’t think that the government is going to give an assurance (on capital protection and assured rate of return), which will be binding in nature."

The finance ministry in 2008 had increased the ceiling on investment in equities by provident funds to up to 15% of the corpus from the earlier 5%, but restricted it to equity shares of firms in which derivative trades are allowed on the National Stock Exchange and the Bombay Stock Exchange.

At present, EPFO’s corpus is invested largely in government debt and bank deposits. Around half the corpus is invested in the Union government’s Special Deposit Scheme.

“The finance ministry could give the guarantee for the initial five to six years. If the result is encouraging, then the labour ministry will decide the future plan. With positive returns, the amount invested in equity markets may be increased," the official revealed.

The official said if the money invested fetches more return than the assured rate of interest, the extra income may be divided between EPF holders and the government. “This will boost the government exchequer while keeping the EPF account holders quite happy," he added.

Prabhat C. Chaturvedi, secretary in the labour and employment ministry, confirmed that the ministry had sent its recommendations, but declined to divulge any details.

Bhupendra Meel, associate vice-president of retirement trust solutions at AK Capital Services Ltd, said the asset class (EPF) and the equity market have certain similar characteristics in the form of a long-term horizon. “Our market has evolved and there is no harm in exploring the opportunity in the equity market. The weightage of the money going to the stock market may be small, but it should not be kept out of the option list."

EPFO covers around 80 million employees, including any unit that employs at least 20 people. EPF account holders have been earning 8.5% returns since 2005-06.

On 15 September, EPFO decided to increase the interest rate to 9.5% for the current fiscal. This increase comes from a surplus of 1,731 crore that EPFO found in its account books following the adoption of a new accounting system.