Indian Economy News

EPFO may invest up to Rs 90,000 cr in equities

New Delhi: In a major boost to India's capital markets, the Union labour ministry has allowed investing 5-15 per cent of Employees' Provident Fund Organisation (EPFO)'s incremental corpus of about Rs 6 lakh crore in equity-related instruments, in the form of exchange-traded funds (investment funds traded on stock exchanges).

This means Rs 90,000 crore of the EPFO's corpus could find its way to equity markets. Currently, the EPFO doesn't invest in equity and equity-related instruments.

"The ministry has sent the notification (for revised investment patterns) to the EPFO for investment of at least five per cent of its corpus in equity instruments by the end of this year," Union Labour Secretary Shankar Aggarwal told Business Standard.

On March 2, the finance ministry had suggested a revised pattern of investment for non-government provident funds, superannuation funds and gratuity funds, effective April 1. However, this had to be approved by the central board of trustees (CBT), the highest decision-making body of the EPFO, chaired by Labour Minister Bandaru Dattatreya. The labour ministry notifies its investment pattern after considering the recommendations of the CBT.

"The ministry has notified the investment pattern with effect from April 1 this year, with no changes in the pattern suggested by the finance ministry," said a senior labour ministry official.

In the past, the labour ministry has shied away from investing a portion of EPFO's funds in the equity market, despite pressure from the finance ministry to do so. It was only under Dattatreya, who chaired his first CBT meeting in December last year, that the ministry considered investment in equities. It had formed a panel to look into the feasibility of such a move.

At the 207th meeting of the CBT, held on March 30 this year, it was decided a portion of the EPFO corpus would be invested in exchange-traded funds.

The investment pattern notified by the finance ministry has suggested 5-15 per cent investment in equity and related instruments, including exchange-traded funds, units of mutual funds regulated by the Securities and Exchange Board of India, index funds and derivatives.

The official quoted earlier, however, said, "We might invest only up to five per cent in these instruments this year."

According to the investment pattern for 2013, the EPFO could invest up to 55 per cent in government securities, up to 55 per cent in debt securities and term deposits of banks, and up to five per cent in money market instruments. The new pattern will allow the organisation to park 45-50 per cent of its funds in government securities, 35-45 per cent in debt securities and term deposits of banks, up to five per cent in money market instruments, 5-15 per cent in equity and related instruments and five per cent in asset-backed securities and units of infrastructure investment trusts.

This is despite the Finance Investment and Audit Committee of the EPFO recommending an initial investment of one per cent in exchange-traded funds, which could gradually be raised to five per cent by the end of this year.

Trade unions have been opposing such a move, fearing exposure to market fluctuations. "All these consultations are farce and we have always protested these. Earlier, the labour department supported us but under the new government, everything is happening with the instructions of North Block," said A K Padmanabhan, president of the Centre for Indian Trade Unions.

The Centre, on its part, says, "Across the world, equity is a preferred class of investment for pension funds. These funds invest 30-40 per cent in equity, as it gives them inflation-indexed returns," said a labour ministry official.

At the CBT meeting in March, both employers and state government representatives had agreed to the finance ministry's proposal on investment in equity instruments, sources said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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