Financial Daily from THE HINDU group of publications
Monday, Nov 11, 2002
Industry & Economy
Investment pattern of EPF monies in for change
NEW DELHI, Nov. 10
A CHANGE in the investment pattern of employee's provident funds (EPF) is on the anvil. The Finance Ministry has kickstarted the exercise of reviewing the existing investment pattern so as to give the EPFO more flexibility in investing EPF monies.
According to senior officials, the Finance Ministry is looking at the pros and cons of increasing the share of the "residual category" beyond the prescribed level of 20 per cent.
Currently, 40 per cent of the EPF monies can be invested in Government securities i.e. 25 per cent in Central Government securities or dedicated gilt funds and 15 per cent in State Government securities or dedicated gilt funds.
Another 40 per cent of the EPF monies can be invested in bonds or securities of public financial instruments and certificates of deposits issued by a public sector bank.
The balance 20 per cent can be invested in any of the above categories, including up to 10 per cent in private sector bonds or securities, which have an investment grade rating from at least two credit rating agencies.
It is this 20 per cent "residual category" that the Finance Ministry is considering to enhance so that the EPFO has greater leeway to shuffle its portfolio between gilts and bonds of PFIs.
As part of the review exercise, the Finance Ministry is also looking at the prospect of allowing trading in Central Government securities. As the move will impact on the debt market, a final view will be taken after consulting the Reserve Bank of India, said a senior Finance Ministry official.
Over the years, the investment pattern of EPF monies has undergone a series of reform-oriented changes. Prior to 1985, 100 per cent of the provident fund monies were invested with the Government. But after 1985, the Government allowed provident fund monies to be invested in State loans and State guaranteed securities (see table). The investment pattern has not undergone any significant change since 1998.
Sometime in May this year, the Central Board of Trustees approached the Finance Ministry seeking withdrawal of the flexibility currently available to non-Government provident funds to invest 5 per cent of accretions in mutual funds subscribing to equity.
While the risk factors involved in investments of PF monies in equity prompted the CBT to recommend withdrawal of the enabling provision in the investment pattern, the proposal was turned down by the Finance Ministry, which reckoned that there were some inherent contradictions.
"On the one hand, the CBT wants investments of PF monies in Government securities and not in equities where the returns could be lower. On the other hand, the Board is in favour of paying a higher interest rate to its subscribers," said a senior Finance Ministry official.
Even now, one extreme view taken by the Ministry is whether the Government should at all continue the practice of prescribing investment pattern for the EPFO in a liberalised regime.
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