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EPFO may pare investments in debt instruments as corporate bonds dry up

Somesh Jha/New Delhi 14 Feb 18 | 12:09 AM

The portfolio managers of the Employees’ Provident Fund Organisation (EPFO) have raised concerns over inadequate supply of corporate bonds in the market, which might lead to the EPFO deviating from its investment pattern.

“Portfolio managers during performance review meetings had expressed concern that at times there are inadequate corporate issuances (in debt and related instruments)," the EPFO said in a recent communiqué.

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The EPFO is required to invest between 35 and 45 per cent of its yearly income in corporate bonds. The portfolio managers have informed EPFO that the interest rate offered in the corporate bond segment is either at par or at times lower than state development loans.

“During the recent performance review meeting of Portfolio Managers held on 2 February 2018, the portfolio managers again expressed their concern over the inadequate supply of quality bonds… that could be purchased at reasonable yields and maturity," the EPFO said.

The portfolio managers told EPFO that since it is mandated to invest at least 35 per cent of EPFO’s incremental corpus in corporate bonds, they are unable to optimise the returns on investment.

“Since there are less than 2 months remaining in the current financial year within which the investment pattern is to be achieved. In the given situation, portfolio managers have expressed that it would be very difficult for them to adhere to the investment pattern," the EPFO said.

In September last year, the Labour and Employment Ministry had allowed EPFO to invest up to 65 per cent in government securities, up from a maximum limit of 50 per cent earlier. However, the portfolio managers said that the exposure in corporate bonds was not subsequently reduced.

The Labour and Employment Ministry has now asked the Finance Ministry to allow the EPFO to increase its maximum share of investments in government securities from 65 per cent. “We have reached the maximum limit for investment in government securities that give us a rate of return of around 8 per cent. Since there is a limited supply of bonds issued by listed companies, we have asked for changes in the investment pattern," a senior Labour and Employment Ministry said.

The issue will also be discussed in the EPFO’s central board of trustees’ meeting to be chaired by Labour and Employment Minister Santosh Gangwar on February 21.

In 2017-18, the EPFO is estimated to receive Rs 1.28 trillion as contribution from employees – a sum which gets invested in various instruments as per the investment pattern notified by the Labour and Employment Ministry in April 2015. Apart from corporate bonds and government securities, the EPFO is mandated to invest a up to 5 per cent in short-term debt instruments, 5-15 per cent in equity and related instruments and up to 5 per cent in asset-backed, trust structured and other investments.

The EPFO has five portfolio managers at present – State Bank of India, ICICI Securities Primary Dealership, Reliance Capital Asset Management, HSBC Asset Management and UTI Asset Management.

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