The proposal will be taken up by the central board of trustees (CBT) of the EPFO next month. CBT is the top decision-making body of the fund that manages over 5,00,000 crore on behalf of workers in the organised sector.
Last year the EPFO had included bonds of LIC Housing Finance and Infrastructure Leasing and Finance Company in the basket of eligible securities. Investment was allowed only in bonds of those private companies where a minimum 26% of shares are held by the government or public sector units.
The proposal is part of the new guidelines suggested by the EPFO for eligibility of private entities and is based on a paper submitted by rating agency Crisil in the CBT meeting last month. It will be taken up at the CBT meeting on February 15.
"There is a need to invest in more private companies and get higher yields while ensuring sufficient security of the bonds," a labour ministry official said.
Trade unions, however, are not in support of the move. They maintain EPFO should stick to the safety of government bonds.
"The EPFO cannot put workers' money in jeopardy for the sake of higher returns," said DL Sachdev, secretary of All India Trade Union Congress and a member of CBT.
The finance ministry has been trying to persuade the EPFO to invest in equities for higher returns.
"The nominal returns of, say 8.5% (from current investments), when coupled with over 8% rate of inflation, result in negative real returns," financial services secretary R Gopalan said in a recent letter to labour secretary PC Chaturvedi.
The EPFO has been declaring 8.5% return for many years but it has recommended a higher 9.5% rate for the current year, having discovered about 1,700 crore in its interest suspense account. The fund is under pressure to show better returns.
As per the proposal, private entities with a net worth of 5,000 crore or more, dual AAA rating by two rating agencies and dividend-paying record for the last 10 years are eligible for receiving EPFO investment.
The maximum tenure of such investment should not exceed 10 years and all investment in the private sector bonds should be secured.
The Crisil report said no bond rated AAA by it has defaulted or moved below the AA category in its history of 23 years.
The default experience, spanning 22 years, of private sector AAA-rated entities has been as good as that of the public sector AAA-rated entities, the rating agency said, justifying its recommendations.
The AAA is the highest rating, indicating the ability of a company to repay its debt. AA rating is a notch below AAA rating, but indicates that the company is sound enough to discharge its debt obligations.
The CBT will also consider raising the maximum limit for investment from 25% of the net worth to 40% since these limits have been nearly exhausted in eligible companies.
Source:economictimes
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