The finance ministry has proposed some major changes in the investment pattern of provident and pension funds by increasing the exposure to equity and equity-related mutual funds to about 30%, which can ensure higher returns for subscribers and increase the depth of the capital market.
According to the draft guideline that is to be implemented from April 2015, the exposure in equity and exchange-traded funds will each be 15% of the incremental investment. In contrast, the exposure in government bonds is to be lowered to 40% from the earlier 55% and that in corporate bonds and bank fixed deposits is to remain the same at 40%, said the draft guidelines reviewed by FE.
Further, the finance ministry has proposed some relaxation in PFs investing in bank deposits. While the earlier rule allowed PFs to invest in fixed deposits of only those banks which had NPAs of less than 2%, the new rule extended it to not more than 4%. Also, the PFs have been allowed to invest in rated infrastructure debt funds asset backed securities. PFs can also invest some money in debt mutual funds regulated by Sebi, said the new investment guideline.
The EPFO, which has an investment corpus of R6.3 lakh crore, invested R86,077 crore in bonds during 2012-13. If it is allowed to invest 15% each in equities and ETFs, more than R26,000 crore of incremental funds can flow into the equity market annually. "We will call a meeting of the central board of trustees (CBT) soon for considering the new investment guidelines," central provident fund commissioner KK Jalan told FE.
In 2008, the finance ministry had proposed 15% equity exposure for PFs but the trustees of EPFO did not approve it, fearing erosion in the value of employees’ hard-earned long-term savings.
Trade union members in the CBT voiced concerns over the draft guidelines and said they will oppose it this time as well. "We will not accept equity exposure for the security of employees’ savings," said DL Sachdev of AITUC. "We can accept it if the government gives a guarantee," said Sachdev, who is also a CBT member.
This time around, the finance ministry has put in some safeguards such as allowing investment in derivatives such as credit default swaps to hedge against the risk in the capital market. Also, if the rating of any instrument fall below investment grade, the option of exit shall be considered and exercised by the PFs.