Home / Politics / Policy /  EPFO to invest 5% of its corpus in stock market

New Delhi: Ending years of doubt and scepticism, the labour ministry on Tuesday decided to invest a portion of the Employees’ Provident Fund (EPF) corpus in the equity market, likely giving the stock market a boost in the new fiscal year beginning Wednesday.

The ministry said it will adhere to the finance ministry’s suggestion to enter the equity market.

To begin with EPF Organisation (EPFO) will invest 5% of its incremental corpus or a little over 8,000 crore in exchange traded funds (ETF). An ETF comprises a clutch of stocks that reflect the composition of an index, like S&P CNX Nifty, or BSE Sensex, and are traded on stock exchanges like company stocks.

“We will invest in ETFs which reflect the Indian economy," said labour secretary Shankar Agarwal after a meeting of the central board of trustees (CBT), the apex decision-making body of EPFO.

“These are long-term investments and such a move will only help EPF subscribers. The finance ministry suggestion on investment pattern shall be notified soon—maybe within a week," Agarwal said.

The finance ministry had advised in March that the labour ministry invests between 5% and 15% of PF money in equity. This was viewed by experts as a push by the National Democratic Alliance (NDA) government for a reform in EPFO, which manages a corpus of over 6 trillion by itself. Some 2 trillion more is managed by exempted establishments or company trusts under guidelines set by the EPFO and the labour ministry.

Three months back, labour minister Bandaru Dattatreya had hinted that his ministry will look at all investment options and had asked EPFO officials to give him details of all types of investments and their benefits, Mint had reported on 6 December.

Despite protests from trade unions, the labour ministry garnered support from the industry and state governments, and decided go ahead with the finance ministry’s suggestion on equity investment.

Initially, trade unions said that since the finance ministry does not contribute to the EPF corpus, its suggestion on the investment pattern cannot be binding on EPFO. But central provident fund commissioner K.K. Jalan told Tuesday’s CBT meeting that the government of India, having granted EPF and its pension scheme tax free status, has the power to guide its investment norms. If the finance ministry sets him a direction on a certain pattern of investment, he is bound to follow it, he said.

Jalan said that with improvements in the economy, returns from debt investments would shrink and lower returns will not be acceptable to the central board. He gave the meeting the example of the railways, saying it was raising substantial amounts of money from the Life Insurance Corporation of India, and that too at less than 8% interest rate. By investing a portion of the EPF money in equity the long-term return can be much higher, he said. EPF subscribers received an 8.75% payout on their savings in 2014-15.

In fact, the labour ministry had come well prepared for the CBT meeting and to deal with objections. It had invited three executives from the National Stock Exchange (NSE) to make a presentation on the benefits of long-term investments in equity.

In their presentation, the NSE executives said globally retirement funds are an important part of the economy. Quoting a 2015 survey of on global pension funds by consulting company Tower Watson survey of 2015, they said that seven large economies—Australia (51%), Canada (41%), Japan (33%), the US (44%), the UK (44%), the Netherlands (30%) and Switzerland (29%)—are investing a sizeable portion of their pension funds in the equity market.

Jalan told the meeting that by the end of 31 March 2016, EPFO would have invested upto 5% of the corpus in safe instruments like ETFs but that the investment will be made in a staggered manner over the next 12 months.

Depending on the progress, EPFO may in future consider investing more of its income in equity. In 2014-15, EPFO garnered an incremental income of more than 1.6 trillion.

Trade unions alleged that the labour ministry, without having sought an interest rate guarantee, is taking EPF money to the equity market because of pressure from the finance ministry. Virjesh Upadhyay, general secretary of Bharatiya Mazdoor Sangh, a national trade union affiliated to ruling Bharatiya Janata Party, said there is no need to follow the example of other countries in the matter of investing EPF money in equity.

“What has not happened for years, is happening now. Technically, we cannot stop them, but it’s clear that the change of heart at the labour ministry was due to pressure from north block (the headquarters of the finance ministry)," said A.K. Padmanabhan, president of the Centre of Indian Trade Unions (Citu), an affiliate of the Communist Party of India (Marxist). He said the labour minister had told them that this decision will not harm workers and their money “but what is left after the meeting is that the labour ministry may write a letter to us after notifying the new investment pattern."

Sharad Patil, secretary general of the Employers’ Federation of India, an industry association, however, supported the move for long-term investments in equity. The move was also supported by state representatives from Gujarat, Haryana and Madhya Pradesh, as well as representatives of industry lobbies like the Federation of Indian Chambers of Commerce and Industry and the Confederation of Indian Industry.

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout