New Delhi: The Employees Provident Fund Organisation (EPFO), the state-run retirement funds manager, has written to the finance ministry seeking permission to invest more in government securities, including so-called state development loans—bonds issued by state governments in a process overseen by the Reserve Bank of India (RBI).

The move has been prompted by its dissatisfaction with the quality and quantity of corporate bonds and other corporate credit instruments on offer.

EPFO wants the centre to allow it to invest in governments securities, including SDLs, “up to 100%" of its incremental corpus". Currently, EPFO is allowed to invest a minimum of 45% and a maximum of 50% in such instruments. And it is allowed to invest a minimum of 35% and a maximum of 45% in corporate bonds and other instruments issued by the private sector as well as state-owned firms. The current fiscal has seen a serious mismatch between demand and supply of corporate bonds and other credit instruments. As a result, EPFO, in the first five months of the year, has been able to invest only 7,600 crore in these, which is way below what it should have been, according to a document reviewed by Mint.

EPFO estimates that in this fiscal, it will have an incremental corpus of at least 1.15 trillion. That means EPFO needs to invest up to 45,000 crore in corporate bonds and other credit instruments in order to attain the investment pattern notified by the labour ministry on the advice of the finance ministry.

“The attainment of the above percentage of investment appears to be very difficult; rather, the same may not be possible without compromising with the rate of return on the investments made by EPFO," the government document said.

Central provident fund commissioner K.K. Jalan said EPFO is seeking a relaxed investment pattern under which it has the flexibility to invest up to 100% in government securities and SDLs. “Instruments such as SDL are now giving a better rate of interest than corporate bonds, and these are safe investment instruments, too. So, we need permission for a flexible investment pattern, looking at the interest rate and without compromising the safety factor," Jalan added. Currently, SDLs offer an interest rate between 8% and 8.24%.

In the document, EPFO argues it is “against common sense" to invest in corporate bonds and credit instruments when investments in SDLs are safer and more remunerative.

Jalan said a request to this effect has been made to the department of financial services and that EPFO believes it is likely to get a go-ahead. He, however, said there are no plans to stop investing 5% of the incremental corpus in equity in the current fiscal. EPFO also wants to invest in bonds and term deposits of “AA+" rated private scheduled private commercial banks. It currently invests only in such instruments from “AAA-rated" institutions.

Jalan said better returns will help EPFO offer more interest to its over 40 million subscribers. EPFO has a total corpus of over 6 trillion. Another 2 trillion is managed directly by some employers under the broad guidelines put down by EPFO.

Gautam Bhardwaj, director, Invest India Economic Foundation, a private think tank in the space of pension fund investments, said as most non-government PF funds follow a similar kind of investment pattern, EPFO and the finance ministry will have to weigh whether they can relax the investment pattern only for EPFO. “The government has to take a call whether the labour ministry-run EPFO can get preferential treatment—though they are the biggest such funds catering to a huge pool of workers," he added.