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8/11/2019 Pension Funds Investing in Equities India
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9/14/2014 Narendra Modi government may allow EPFO to invest in markets, Rs 6,000 crore to flow into stocks annually - The Economic Times
http://economictimes.indiatimes.com/markets/stocks/news/narendra-modi-government-may-allow-epfo-to-invest-in-markets-rs-6000-crore-to-flow-into-
You are here: ET Home Markets Stocks News
By Vikas Dhoot, ET Bureau | 5 Sep, 2014, 06.52AM IST Post a Comment
Proposed change in norms may funnel Rs 6,000 crore annuall
into stocks, making PF body second-biggest domestic investo
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Narendra Modi government may allow EPFO to invest inmarkets, Rs 6,000 crore to flow into stocks annually
NEW DELHI: The Narendra Modigovernment may shatter a longstanding bar on the state-
run pension fund putting money into equities, sending a flood of money estimated at Rs
6,000 crore per year at least into the stock markets, potentially making this the biggest
source of domestic institutional investment after LIC.
Such a move, which comes as attractive returns from the Indian stock marketshave drawn
the world's biggest pension funds, could ease some of the concentration of riskthat stems
from overseas investors dominating the market, experts said. India's largest retirement fund,
the Rs 6.5-lakh-crore Employees' Provident Fund Organisation (EPFO), has finally opened
its mind about entering the stock market, after nearly a decade of resistance to a finance
ministry pitch to park a part of its kitty in equities.
To start with, it is looking at deploying 5% of its corpus in stocks, index funds and exchange-
traded funds, based on the recommendation of a high-level panel set up by EPFOthat ET
has reviewed. To make this possible, EPFO has said the obsolete Indian Trusts Act, 1882,
needs to be amended to allow trusts to invest in securities that are not backed by the
government. The UPA regime had introduced a Bill to carry out these changes in 2009, but
it let the legislation lapse though a parliamentary panel led by BJP's Murli Manohar Joshihad given its approval.
Annual fund flow to EPFO kitty set to rise
Annual inflows into the EPFO kitty amount to about Rs 60,000 crore but are expected to go up sharply thanks to an increase in the salary
ceiling for statutory provident fund (PF) contributions from Rs 6,500 per month to Rs 15,000 per month, effective from September 1.
The change of stance on equities within EPFO, the country's second-largest nonbanking financial institution after Life Insurance
Corporation, is being driven by two imperatives the need to generate better returns for members and an inability to find suitable
investment options that can be compounded by the higher accretions to its corpus expected in the coming months.
In internal presentations to board members, top PF
officials have said the annual EPF rate has been
lower than consumer price inflationin four of the pas
five years, so there is a need to boost returns by
considering equity, infrastructure and real estate
investments that pension funds around the world use
to prevent the erosion of savings through this
avenue. Over 85% of EPFO's money is currently
held in government bonds while the rest is parked in
debentures or securities issued by banks and public
sector enterprises. Though investments in private
sector debt are allowed, the norms are so strict that
only 5.65% of its corpus is invested in such bonds
out of a permissible allocation of 10%.
Conservative back-of-the-envelope calculations indicate that 5% of incremental inflows earmarked for equity investments could add up to
around Rs 6,000 crore a year. In 2011-12, LIChad invested Rs 50,000 crore in equities. By contrast, overseas funds invested Rs 47,000
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9/14/2014 Narendra Modi government may allow EPFO to invest in markets, Rs 6,000 crore to flow into stocks annually - The Economic Times
http://economictimes.indiatimes.com/markets/stocks/news/narendra-modi-government-may-allow-epfo-to-invest-in-markets-rs-6000-crore-to-flow-into-
crore in equities in that year to March the lowest since 2008-09.
8/11/2019 Pension Funds Investing in Equities India
3/3
9/14/2014 Narendra Modi government may allow EPFO to invest in markets, Rs 6,000 crore to flow into stocks annually - The Economic Times
http://economictimes.indiatimes.com/markets/stocks/news/narendra-modi-government-may-allow-epfo-to-invest-in-markets-rs-6000-crore-to-flow-into-
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The finance ministry had first opened up the equity option for non-government retirement funds such as EPFO in 2005, with a 5%
allocation in their investment pattern. It enhanced this window to 15% in 2008 and has now proposed allowing up to 30% investment in
index funds, exchange-traded funds (ETFs) and stocks whose derivatives are traded on bourses from April 1, 2015. "It's high time that
EPFO began equity investments, and it should start with the employees' pension scheme, which has pooled savings, instead of individua
accounts. The higher positive returns from equities in the long run could help curb the scheme's deficit that is currently at Rs 11,000
crore," said Amit Gopal, senior vice-president at India Life Capital, which advises top corporates on retirement benefits.
Gopal said the experience from the pension scheme's equity foray should be gauged before introducing it in the EPF scheme. "A phased
approach will help create a buy-in for stocks and also give EPFO the time to improve its accounting and disclosure standards," he said.
Ahigh-level committee set up by the PF office to examine the finance ministry's new investment norms has said it is "imperative to invest
minimum" 5% of its inflows in stocks and index funds or ETFs.
The panel, led by former State Bank of India managing director S Vishvanathan, has said that long-term investments in equity gave stable
returns "much like bonds". Apart from mooting changes in the archaic Indian Trusts Act, according to which even existing PF investments
in corporate bonds are technically impermissible, the committee has mooted several changes in EPFO operations to facilitate equity
investments.
These include effective risk management norms and a change in the valuation methods. EPFO and about 3,000 PF trusts regulated by it
value their bond-laden portfolios on a held-to-maturity basis while stocks need to be valued on a marked-to-market basis.
Though the official statement issued by the labour ministry after an EPFO trustees' meeting last week said the board was not in favour ofinvesting in equities and ETFs, members present at the meeting said the board didn't discuss the issue much after one member pointed
out that the expert committee led by Vishvanathan had asked for an amendment to the Indian Trusts Act before approving equity
investments.Board members told ET that they understand the dearth of investment options faced by EPFO's expanding kitty and are open
to considering new alternatives.
"At our board meeting on August 26, we have okayed a major relaxation in norms for investing in corporate bonds. We understand that
returns can also improve with equities, so (we) would support a move to invest the pension and life insurance schemes' corpus into
stocks," said a senior trade union leader, requesting anonymity owing to the sensitivity of the issue.EPFO offers its 8.5 crore members
three benefits a lump sum EPF benefit at retirement, a monthly pension income and a life insurance cover during their working careers
The benefits are financed by remitting 24% of an employee's salary to EPFO. About a third of this, or 8.33%, goes to the pension scheme
Since the EPF rate is declared annually, akin to a dividend, EPFO could move to a net asset value-based system (used for valuing mutua
funds) for the equity portions of its portfolio.
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