The corporate bond market in India now stands a chance of revival if the Employees Provident Fund Organization (EPFO) gets its way into the Indian bond market. At present, the Indian bond market is stagnating with a market cap of a meager 3% of the GDP as compared to 43% for Malaysia and 35% for Hong Kong. There is almost a complete lack of retail participants in the bond market.

 

Also as an employee you now stand a chance to earn more returns on your provident fund account as the yields offered by the private companies’ securities are quite attractive. However, the proposal needs the last but an important nod of the apex decision-making body of the EPFO i.e., the Central Board of Trustees (CBT) in order to be implemented. But that doesn’t seem to be easing going for the EPFO as the trade unions are not in support of the move and might play spoil sport.

 

As per the proposal, private entities with a net worth of 5,000 crore or more, dual AAA rating (by two credit 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 AAA is the highest rating, which reveals the resilience 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.

 

We believe that the EPFO’s proposal to increase their investment basket seems to be prudent step, which holds the objective of achieving higher yields. Moreover, the proposal of having only AAA rated debt papers of companies, ensures safety. But again in our opinion the fund management skills play a vital role as debt markets are susceptible to interest rate movements. However, the EPFO’s entry in the corporate bond market will be a blessing in disguise as it will help in generating volumes and thereby liquidity in the stagnating corporate bond market.

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