Last week, the top decision-making authority of the EPFO permitted the body to invest up to 5 per cent of its annual deposits in alternative investments, including infrastructure investment trusts (InvITs) of public sector entities.
According to prevailing norms, the fund is permitted to invest 45-50 per cent of incremental deposits in sovereign securities, 34-45 per cent in other debt instruments, 5-15 per cent in equities and up to 5 per cent in short-term debt securities. EPFO’s monthly deposits range from Rs 15,000 crore to Rs 16,000 crore, or Rs 1.8 lakh crore to Rs 1.9 lakh crore annual deposits.
With the Reserve Bank of India embarking on an ultra-loose monetary policy since March 2020 to shield the economy from the impact of the coronavirus crisis, yields on government securities and other debt instruments have eased significantly, with real interest rates staying deeply negative for quite some time now.
At the latest auction of Treasury Bills, the cutoff yield for one-year papers was set at 4.13 per cent. On the other hand, the RBI forecasts Consumer Price Index-based inflation at 5.2 per cent in April-June of the next financial year. There is a pressing need for the EPFO to diversify investments and provide the most lucrative returns to investors, albeit within the limited framework it is permitted to function within.
According to money managers who have handled EPFO accounts, the option to invest in public sector InvITs essentially translates into the fund taking on equity exposure, where a return of around 10-12 per cent could attract investment flows. The investments would also benefit by virtue of being non-taxable.
Money managers, however, emphasised that the investments should ideally be in established names such as the infrastructure investment trust of Power Grid Corporation of India or an entity like the Embassy Real Estate Investment Trust.
“They have to use their judgment and be careful about the names they are picking. I’m saying that it’s not very different from equity. Sticking with good names will definitely bump up the return a bit,” said Naveen Singh, head of trading and executive vice-president at ICICI Securities Primary Dealership. “The whole objective is because there is a chase for returns and that is what is leading them to diversify. A pure-debt investment is not fetching us anything now because real rates are negative. The risk and the return won’t be very different from a broad-based equity exposure. It’s a chase for return.”
InvITs, which are under the regulatory purview of the Securities and Exchanges Board of India, are essentially alternate investment funds that function like mutual funds by facilitating infrastructure developers to monetise assets through a pooled structure.
Analysts have warned that with real rates being so negative, “real” money, such as the funds deposited in the EPFO, would start chasing riskier assets, which could eventually lead to the buildup of imbalances within the system.
“Either it was 2003 or 2010; the chase for yield creates that problem. In India, that had happened after demonetisation. Suddenly, there was an influx of money and people were lending left, right and center and once the liquidity started to dry out, we saw the fallout,” Singh said. “NBFCs were looking stressed and banking balance sheets were stressed. So, those things can happen again. In any case, the EPFO must be having some kind of debt exposure of NHAI or Power Grid in the form of their bonds. So, taking some kind of an equity exposure in those names — if they are particular about the names — shouldn’t be a problem.”
