The Employees Provident Fund Organisation (EPFO) is finding itself in a bind following the finance ministrys investment guidelines of October 2008 that limit the funds exposure to bonds of public sector undertakings to 40 per cent. EPFO could invest up to 60 per cent of its incremental deposits in PSU bonds that fetch the highest rate of return among all categories of securities the fund is allowed to invest in.
The Central Board of Trustees the policy making body of EPFO may recommend imparting flexibility to the fund by allowing it to invest up to 55 per cent in PSU bonds from 40 per cent now in its meeting on Saturday. The October 2008 guidelines of the finance ministry allow EPFO to invest up to 55 per cent in Central and state government securities and government-guaranteed securities; up to 40 per cent in PSU bonds and up to 5 per cent in money market instruments a new category introduced by the ministry. The CBT may also recommend enhancement of investment in money market instruments to 10 per cent. As far as investment in government securities is concerned,sources said,the limit of 55 per cent may be maintained.
The EPFO is struggling to find safe and high-yielding avenues for parking its incremental investments. In 2007-08,incremental corpus of EPFO swelled to Rs 30,900 crore,a jump of almost 25 per cent compared to the incremental corpus in 2006-07 of Rs 24,870 crore.
In a related issue,the CBT will also look at enhancing the cap on investment in the PSU bonds which stands at 25 per cent of the PSUs net worth. As per existing guidelines,EPFO can invest up to a maximum of 25 per cent of net worth of a PSU or public sector financial institution (PSFI) and up to a maximum of 30 per cent of the net worth of a public sector bank. This severely restricts the exposure limit in a single PSU entity.
The agenda note prepared by the EPFO said that four most frequent fund raisers in the capital market are EXIM bank,National Bank for Agricultural and Rural Development,Rural Electrification Company and Power Finance Corporation. EPFO is not in a position to subscribe to their issuances,however attractive the returns may be,because the limit of 25 per cent of net worth of these institutions has already been exhausted, said the note.
Citing market practices,where Insurance Regulatory and Development Authority has relaxed this norm for insurance companies to 60 per cent of net worth of the institution,the note has asked for enhancing this limit for EPFO investments to 40 per cent and 45 per cent for PSU and PSFI; and public sector banks respectively. However,it has set a rider that the increase in the exposure limit will be restricted to the AAA-credit rating (highest safety rating) instruments issued by public sector entities only.