Amid market rally: After 2-year gestation, EPFO looks to cash in on market bets

Amid market rally: After 2-year gestation, EPFO looks to cash in on market bets

The retirement fund body is strategising with its consultants to gain best returns for its investment and reach a formula through which it can distribute the profit made to the subscribers.

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The EPFO has firmed up the view to offload its ETF units to realise ‘actual’ gains from its equity investment.

A little over two years since it started investing in equity-linked instruments, retirement fund body Employees’ Provident Fund Organisation (EPFO) is finalising the modalities to monetise its investment in Exchange Traded Funds (ETFs) to cash in on the uptick in the equity markets. The proposal, which is intended to realise actual gains rather than notional one from its equity-linked investments, is likely to be taken up by the EPFO’s Central Board of Trustees (CBT) in the later part of January. The cashing in of its equity investments could also have a bearing upon the finalisation of EPF interest rate for 2017-18, two senior government officials said.

One of the officials cited above said that the retirement fund body is working in close coordination with its consultants to decide the optimal rate of return at which they would sell off a portion of their ETF holdings to generate additional cash flow, even as it plans to transfer the ownership of the rest of the ETF units from the EPFO to the subscribers. The EPFO is currently in the process of deciding the floor level for accrued profit and then decide how much of the profit will then be distributed amongst its subscribers, the official said, adding that the proportion of the cash and units could be 85 per cent and 15 per cent, respectively.

“We have to prepare the software that will probably get completed by March and we will start crediting the accounts with units from April…based on that we have to rework our policy on offloading the ETF. There’s no point in sitting on it. We have to sell it in the market. Only then the actual physical cash will come to us because as of now whatever ETF we have invested is in the name of the EPF, the units have not been credited into the individual accounts. It’s a consolidated ETF in the name of EPFO a notional thing. We need to offload in the market or have a sort of a plan as to how we will offload it, whether at 15 per cent return or 20 per cent return, or whatever it is, that has to be worked out. That is being worked upon and then it will be taken to CBT for its approval, which should be probably in the second week of January,” the official said.

Only after the details pertaining to returns from various investments are finalised, the EPF interest rate will be determined for 2017-18, following which it would need approval of the CBT and subsequent ratification by the finance ministry, the official said.


The EPFO has firmed up the view to offload its ETF units to realise ‘actual’ gains from its equity investment, instead of ‘notional’ gains followed in its accounting policy so far after concerns were raised about the same by Comptroller & Auditor General (CAG). “CAG will not allow that because it’s a notional thing. It’s only on paper, unless you sell it. So how do I credit the money in the subscriber’s account, it’s not possible. That is why we are preparing a policy for that limited purpose to have an exit policy,” one of the officials cited above said.

The official said that the fine tuning of exit policy is being done so that the gains from monetisation will accrue to the members in the form of cash out of the redistributable profit along with units, which can be sold off by the subscribers at the time of early withdrawal or at the time of exiting the Fund.

“When our software is ready, whatever equity/ETF we buy, 85 per cent will be cash and 15 per cent will be shown as units in the subscribers’ accounts…you as an individual member of EPFO will have in your account, two portions. One will be cash, other will be units of ETF. Then you take a call whether you want to sell it today, tomorrow, or day after. So it’s only for the limited purpose where the units were not credited in their accounts, we need to take a call on offloading. That will decide the interest rate,” the official explained.

The software for exit policy and crediting of units is being developed by Centre for Development of Advanced Computing (C-DAC), the R&D wing of the Ministry of Electronics and Information Technology.

The CBT, in its last meeting had approved an accounting and disbursing mechanism for the equity-linked investments to enable its 4.5 crore subscribers to track and redeem at market price the portion of their Provident Fund money invested in equity shares.

The EPFO, which manages a corpus of around Rs 10 trillion, has been investing in the stock market since August 2015, using ETFs, marketable securities that track an index like the BSE Sensex or the NSE Nifty, a commodity, bonds or a basket of assets. The CBT in its May 2017 meeting had approved hike in equity-linked investment limit to 15 per cent. In FY16, the Fund invested 5 per cent of the annual incremental corpus in equities, which was raised to 10 per cent last fiscal. Cumulatively, on its investments of over Rs 35,400 crore in ETFs so far (till November), the Fund has earned an annual return of 18.94 per cent.

In a letter dated September 12, the CAG while offering its comments on the new accounting policy for EPFO’S investment in equity had concurred with the retirement fund body that all investments should be marked to market and unrealised gains (losses) may be set aside to an account termed as ‘unrealised gains or losses due to MTM accounting’. The net asset value (NAV) computation, allotment of units and payout will be done on the last working day of the month, the CAG had told EPFO in the letter. The CAG had, however, disagreed with the EPFO’s proposal to adjust the difference in NAV and contribution of subscriber in the unrealised gains reserve at the time of retirement/exiting of the subscribers citing Sebi regulations.