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Sunday, September 27, 2020

EPFO Central Board set to okay offloading part of ETFs to meet FY20 interest payout

The Central Board of Trustees, in March, recommended an interest rate of 8.5% for 2019-20, a 15 basis point downward revision from the 8.65 per cent offered in the previous year.

By: ENS Economic Bureau | New Delhi | Updated: September 8, 2020 11:37:44 am
All possible legal options will be explored against these companies, including initiation of criminal action if there is prima facie evidence of a deliberate intent of default,” a CBT member told The Indian Express. (File)

The Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) will meet Wednesday to give final nod for encashment of investments in Exchange Traded Funds (ETFs) to generate revenue for meeting the impending interest payout for financial year 2019-20. The CBT had in March recommended an interest rate of 8.5 per cent for 2019-20, a 15 basis points downward revision from the 8.65 per cent offered in the previous year, for its six crore active subscribers.

An EPFO official said the decision to offload ETF investment was taken in the CBT meeting held earlier this year since the interest rate payout has to be based on income from both the debt and equity portions of the EPFO’s investment portfolio. But, after the outbreak of the Covid-19 pandemic, the market situation was not viewed as feasible “The proposal to offload some ETF investments was taken in the March meeting but then the markets slowed and hence, a decision was taken to defer the offloading of the stake. Now that the markets are doing better, the sale of some ETF investment would be done,” the official told The Indian Express. The issue of delay in ratification of the EPF interest rate for 2019-20 is also likely to be raised in the meeting, Board members said.

The recommendation of the CBT regarding the EPF interest rate will now require ratification from the Finance Ministry which had last year questioned the surplus level and the Fund’s exposure to IL&FS and similar risky entities before granting its nod for the 8.65 per cent rate. This year, the interest rate recommendation is yet to be sent to the Finance Ministry for its approval, officials said. There have been concerns about the EPFO interest rate for FY21, which would be finalised early next year, given the volatility in stock markets. The retirement fund body might find it tough to make its interest rate payout at over 8 per cent for the next fiscal, officials said.

The EPFO invests 85 per cent of its annual accruals in the debt market and 15 per cent in equities through exchange-traded funds. As per convention, after the EPFO’s CBT recommends the interest rate, it has to be ratified by the Finance Ministry and then it gets credited into the accounts of the Fund’s subscribers.

The Finance Ministry has been nudging the EPFO to reduce the rate to sub-8 per cent level in line with the overall interest rate scenario which is under strain given the overall economic slowdown. Small savings rates range from 4.0-7.6 per cent and against these small savings instruments, interest rate for subscribers of EPFO has been recommended to be at a much higher 8.5 per cent for FY20.

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