(Pradeep Gaur/Mint)
(Pradeep Gaur/Mint)

Retirement fund manager may hire new agency to review investments in ETFs

  • Central board of trustees will meet on Wednesday to take a call and lay out the rules for hiring an expert agency
  • EPFO has so far invested around 70,000 crore in stocks but does not have a plan for redeeming its investments

Retirement fund manager, the Employees’ Provident Fund Organisation (EPFO), is set to hire a new agency to help it review and redeem investments in exchange traded funds (ETFs) whenever required, in the wake of ballooning equity investment.

EPFO has so far invested around 70,000 crore in stocks through ETFs, but does not have a clear plan for redeeming its investments or credit to the subscribers account. The hiring of a new agency assumes significance as the organisation looks to transfer ETF units to subscribers in a separate account and encash some ETF investments if the market goes down because of a slowdown.

The EPFO’s central board of trustees will meet on Wednesday to take lay out the rules for hiring an expert agency, said two government officials familiar with the development, requesting anonymity, The documents were also reviewed by Mint.

Credit rating firm Crisil Ltd has been working with the EPFO for several years. The new agency will complement Crisil in reviewing the “working of portfolio managers and assist the investment committee in redemption of ETFs".

The agency shall also “analyse and evaluate investment categories permitted in investment pattern as well as investment guidelines of EPFO, review equity investment/ETF investments on identified parameters and the scope to review ETF manufacturer’s and mutual funds houses engaged by EPFO," said documents reviewed by Mint.

“Deliberations are underway to decide the exact mechanism for transferring amount/units in members’ accounts in respect of amount invested in ETF," said the first official mentioned above. “The new agency will assist in policy formulation for redemption of ETF holdings, including in equity exit policy," the second official added.

The EPFO expects the agencies to render suitable advice “in diversification of investments, as well as conduct a risk audit of the portfolio".

EPFO has a corpus of over 11 trillion. A lion’s share of it is managed by the EPFO, while the rest by exempted trusts working under its overarching guidelines. It gets over 1.2 trillion in annual deposits from subscribers. Of the annual accruals, 85% goes to debt investments and 15% to equity.

“We need a firm that will guide us on the adoption of global best practices of pension funds and the growth strategy, and also help in managing the ETFs better," said the first official.

Earlier, only credit rating agencies registered with the Securities and Exchange Board of India were considered for appointment as advisor to EPFO. However, now the “selection criteria may be open to advisory bodies, consultants having relevant and rich experience in performance evaluation of pension funds, provident fund, insurance funds...".

The EPFO’s central board of trustees on Wednesday will also select fund managers for a three-year term, beginning October. HSBC AMC and UTI AMC are among those managing EPFO’s funds. The trustees are also likely to iron out differences with the finance ministry related to last year’s interest rate payout. The EPFO on 21 February had raised the interest rate on provident fund deposits to 8.65% for 2018-19, up from the 8.55% in 2017-18. However, the finance ministry had raised questions on whether the EPFO had the corpus to pay 8.65%. In response, it had said that it had 152 crore surplus funds.

The doubts of the ministry may have stemmed from the fact that 574 crore of EPFO bond investments in Infrastructure Leasing and Financial Services Ltd (IL&FS) was yet to be recovered. Besides, the retirement fund manager was also seeking early redemption of about 700 crore worth of bonds issued by troubled mortgage lender Dewan Housing Finance Corp. Ltd to safeguard the savings of workers, Mint reported on 14 August.