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Government allows investing 5 per cent of EPFO corpus in stock markets

The overall corpus of EPFO at present stands at Rs 6.5 lakh crore, but the outstanding investible funds are worth about Rs 1 lakh crore.

, ET Bureau|
Last Updated: Apr 25, 2015, 02.50 AM IST
The overall corpus of EPFO at present stands at Rs 6.5 lakh crore, but the outstanding investible funds are worth about Rs 1 lakh crore.  
The overall corpus of EPFO at present stands at Rs 6.5 lakh crore, but the outstanding investible funds are worth about Rs 1 lakh crore.  
NEW DELHI: In a move that could see over Rs 7500 crore of retirement savings of workers going into the capital markets for the first time, Labour ministry has notified the new investment pattern for the Employee Provident Fund Organisation (EPFO).

The new pattern allows the retirement fund body to invest 5% of its incremental income in Exchange Traded Funds (ETFs) from the current financial year.

The limit of investment in ETFs, starting from 1% with effect from April 1 and reaching 5% by the end of the year, is the lower end of the range recommended by the finance ministry that had proposed 5-15% in equities.

The government has gone ahead with its decision to move some of the long term savings in equities despite stiff opposition from all trade unions who have been demanding a government security against any such investment in stock market.

“We have notified the new investment pattern for EPFO. This is not exactly the same as recommended by finance ministry but it will allow EPFO to invest 5% in the ETFs in the current year,” labour secretary Shankar Agarwal said on Friday.

This will mean the EPFO will now invest 5% of its estimated incremental income of Rs 1.5 lakh crore in exchange-traded funds, an indirect and passive investment in equity to begin with.

The decision follows the Finance Investment and Audit Committee of the EPFO clarifying that the government has the right to set the investment pattern. However, the ministry is yet to notify the investment pattern for exempted firms which can invest anywhere between 5-15% of their corpus in equity.

The GN Bajpai-led committee on pensions had also recommended diversification of the investment portfolio to provide long-term resources to productive sectors besides giving greater flexibility to subscribers to maximize returns.

Following the finance ministry’s notification of March, labour minister Bandaru Dattatreya had referred the proposed investment pattern to the Finance, Investment and Audit Committee (FIAC), which at its meeting on March 26 concluded “that the government was competent to notify the pattern of investment and that pattern of investment was binding on the EPFO.”

At the 207th CBT meet on March 30, central provident fund commissioner KK Jalan told trustees, including employers'and employees ‘representatives, that the FIAC was of the view that EPFO may consider investing an initial 1% in exchange-traded funds, which replicate the index and aren’t as volatile as individual stocks.

“This may gradually be increased to 5% by the end of the year,” he had said, adding that the government was the competent authority to finalise the investment pattern as its gives several concessions to pension funds, including exemption from income tax.

Worldwide, pension funds have 52% of their investment in equity with US at 57%, followed by Australia (54%), UK (50%), Canada (48%) and Japan (40%), as per the study by Towers Watson. The EPFO has more than five crore subscribers across the country and has a corpus of over Rs 6 lakh crore.

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