EPFO likely to start investing up to 15% in equities next month

The Employees Provident Fund Organisation (EPFO) will start investing up to 15 per cent of its incremental corpus in equity-related instruments from the next month, sources said.

According to the new investment pattern to be soon made public, the EPFO will invest 5-15 per cent in equity and equity-related instruments such as the exchanged-traded funds (ETFs). This new investment pattern, to be retrospectively effective from April 1, is the same as the union finance ministry had suggested to the labour ministry. Business Standard reviewed a copy of the draft notification.

The union labour ministry is expected to invest five per cent initially in exchange-traded funds (ETF) -- investment funds traded on stock exchanges. Many media reports had suggested EPFO could only invest five per cent in ETFs, according to the new investment guidelines.

Also, the retirement body will not appoint a new fund manager with the change in the notified pattern. At present, the EPFO has five fund managers -- SBI, ICICI Securities Primary Dealership, Reliance Capital, HSBC AMC and UTI AMC for managing its corpus for the next three years.

"We will start investing in ETFs likely from the next month," said a union labour ministry official.

EPFO's total corpus is over Rs 6 lakh crore. An official said the incremental corpus was estimated at around Rs 80,000 crore for 2014-15. This means up to about Rs 12,000 crore could find its way into the stock markets in this year. In fact, this could go even up as the investment would include "sum of un-invested funds from the past, receipts like contributions to the funds, dividend or interest or commission, maturity amounts of earlier investments" among other things, as per the new investment guidelines.

The union labour ministry will have to, however, change provisions of the Employees' Provident Fund Scheme to allow the body to park money in stock markets. Section 52 of the EPF Scheme says the EPFO can invest the employees' money as per Indian Trusts Act 1882. "However, the Indian Trusts Act has already been amended to allow funds to be parked in equity and debt instruments. We will have to make a minor change in the EPF Scheme. We will pass an executive order in that regard," said the official cited above.

The EPFO has constituted a risk management committee to monitor the returns of the investment in equity and equity-related instruments.

"There should be another layer to ensure that the rules of the game are transparent and everybody is accountable," said another official.

The committee is studying the systems followed by various bodies such as Life Insurance Corporation of India (LIC), India's largest insurer, to invest in equity instruments. In 2013-14, LIC had invested Rs 40,000 crore in equity markets.

EPFO's investment in ETFs would be a significant move as the retirement body has shied away from such a move in the past. This has followed the finance ministry's suggestion of a revised pattern of investment for non-government provident funds, superannuation funds and gratuity funds in March. This was 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 new pattern will allow the EPFO 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.