Relaxing its stringent investment guidelines for Employees’ Provident Fund Organisation (EPFO), the Government has allowed it to invest in bonds issued by any private player satisfying pre-determined criteria.

With new directives coming into force, EPFO would now be able to invest in private bonds without seeking any prior approval from Central Board of Trustees (CBT). The new investment pattern has been approved by the finance ministry and soon be notified by the labour ministry. This move is expected to generate higher returns for investors of Employees’ Provident Fund (EPF)

EPFO may now invest in any private sector company satisfying some basic criteria which include;
 

 

√   The Bonds of a private company must have been rated as "AAA" by atleast 2 independent rating agencies.

√   Company needs to be a listed entity

√   Has a record of generating profits for last 5 years

√   Has networth of at least Rs 3,000 crore

√   Must have paid minimum 15% dividend for atelast last 5 years

√   Bonds should have a maturity of atleast 10 years at the time of issue

 

As per EPFO, 7 companies have met its criteria so far, those are,

 

√   ACC

√   Grasim

√   Great Eastern Shipping

√   Reliance Capital

√   Reliance Industries

√   UltaTech Cement

√   Larsen & Toubro

 

In our view, although relaxed, new guidelines still follow the cautious approach of EPFO. The “AAA" status would ensure the bonds are rated next best to the sovereign debt. Moreover, the requirement of them being rated by at least 2 rating agencies would significantly minimise the chances of any misjudgement about financial health of the company. The rest of criteria would further support the ratings. Besides this, EPFO may have its own assessment of the company.

We believe that opening up of EPF for private sector companies would not only yield better returns to investors but would also relieve banks ,which currently face asset liability mismatch, from the pressure of meeting incremental demand for corporate credit. EPFO has a base of 8 crore investors and the corpus size is about Rs 4.5 lac crore. In the wake of persisting liquidity crunch in the system, new rules will now allow financially sound companies to tap long term funds via EPFO route and deepen the debt market in India.

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