BackEPFO to sell ₹9,000 crore ETFs to meet fund shortfall
Out of the ₹9,017 crore, ETF units worth ₹7,900 crore are with SBI Mutual Fund and the rest with UTI Mutual Fund
PremiumThe Employees’ Provident Fund Organisation (EPFO) will sell more than ₹9,000 crore of investments in exchange-traded funds (ETF) to bridge a shortfall by booking profits and keep its promise to millions of subscribers.
In September, the board of the retirement fund manager had said almost 0.35% of the 8.5% interest rate promised for 2019-20 would be fulfilled by selling ETFs. According to documents seen by Mint, EPFO will sell ₹9,017 crore of ETF investments made in 2016, in 15 to 20 tranches. The earliest investments will be sold first, to be followed sequentially by the later ones. The EPFO expects to make ₹2,850 crore profit from the sale, which will be sufficient to make up its shortfall.
“The tentative income (profit) from the sale of ETF for the period 01.01.2016 to 31.12.2016 would be to the tune of approximately ₹2,850.63 crore. Since the market is fluctuating, this can only be taken as a tentative figure, which may increase or decrease. Therefore, substantial surplus needs to be kept to take care of any fluctuation," the EPFO documents showed.
Out of the ₹9,017 crore, ETF units worth ₹7,900 crore are with SBI Mutual Fund and the rest with UTI Mutual Fund. Both fund houses have invested in Nifty 50 and Sensex ETFs. Of the total profits, ₹2,510 crore will come from SBI MF units and rest from UTI MF.
EPFO has estimated its earnings from ETF as on 7 September, a member of its central board of trustees (CBT) said, confirming information in the documents. “The cost of acquisition of these ETF units in 2016 was almost ₹6,166 crore, and now they can be liquidated for over ₹9,000 crore, allowing EPFO to pass on gains to subscribers and still have a surplus for next year," said the CBT member, seeking anonymity.
Benchmark indices such as the Nifty and the Sensex have gained over 5% during 7 September-12 October; so selling the ETFs now will fetch EPFO ₹2,990 crore, or almost ₹140 crore more than what was initially estimated.
“Markets have gone up, and EPFO should quickly liquidate ETFs and formally credit the interest rate of 2019-20 to subscribers without waiting for another three months," the CBT member added. The official said “even if one takes the September calculation, EPFO can pay 8.5% rate even today by selling earmarked ETFs, and still have over ₹700 crore of surplus. And a 5% upside in the broader market means more surplus to be used in 2020-21".
EPFO will sell these investments in multiple tranches to reduce downside risk to less than 5% in the worst case. An average of seven days’ net asset value of ETFs will be calculated before selling the ETFs, the documents showed.
“Declaration of the rate of interest should be made on 100% corpus comprising 85% debt and 15% equity, instead of only 85% debt," a government official said seeking anonymity. “Hence, any argument that advocates to announce interest only in debt investments is not fair at least till ETF units are credited to subscribers by changing accounting norms."
Currently, EPFO invests 85% in fixed income instruments and 15% in equity via ETFs annually.
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