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| Provident, pension funds create market for oil bonds |
| Abhijit Lele & Kalpana Pathak / Mumbai Aug 03, 2009, 00:41 IST |
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Same status as govt securities, higher coupon rate, got them in
Provident and pension funds are doing what banks did not — purchase oil bonds. Over the past year or so, these fund managers, who manage a corpus of over Rs 25,000 crore between them, have developed a market for oil bonds which was earlier largely confined to Life Insurance Corporation (LIC).
Just a year ago, there were hardly any takers for oil bonds issued to the three public sector companies as the government share of subsidy. While the pressure for selling oil bonds has also come down, thanks to lower crude oil prices and under-recoveries, the new players have ensured that the three public sector players can hope to encash the bonds at no or little discount.
“The universe of investors has changed from insurance companies to private sector mutual funds like HSBC Mutual Fund, Reliance Mutual Fund and ICICI Prudential,” said a dealer with a private bond house. In addition, there is State Bank of India, a fund manager for the Employees Provident Fund Organisation and the New Pension Scheme. Also, there are UTI and LIC, which manage the Centre’s NPS corpus.
In July 2008, EPFO, which manages around 44 million provident fund subscribers, allowed four fund managers (HSBC, Reliance, ICICI Prudential and SBI) to manage its incremental deposits of about Rs 25,000 crore a year. The new players are keen to buy these bonds, as they carry a higher coupon than prevailing government securities of competing maturity. In addition, these bonds are not for trading and are in the held-to-maturity category, which suits these fund managers.
A clarification on the status of oil bonds for investment also improved investment interest, said Manish Luharuka, vice-president, ICICI Securities Primary Dealership. “The status of special bonds as government securities was never in doubt. But a communication from the Union labour ministry that oil bonds are eligible for PF investments made things clear for the fund managers,” he added.
A similar clarification from the Pension Fund Regulatory and Development Authority, which is responsible for the Rs 3,000 crore New Pension Scheme (NPS) also helped.
“We only realised at the end of the financial year that SBI Retirement Solutions had maximised returns by purchasing oil bonds. While we were aware that these would be a beneficial investment in the long run, there was no clarity on whether they could held to maturity or we could classify them as available. But now that it is clear, we are also buying oil bonds as and when they are available,” said an executive at UTI Retirement Solutions, which manages NPS funds.
Last year, with high demand for funds, tight liquidity in the local financial markets had forced the Reserve Bank of India to open a special window to ensure that oil companies were not forced to sell the bonds at a discount. Through the special market operation, RBI bought around Rs 55,000 crore worth of bonds, close to a third of the whole inventory. Oil companies got foreign exchange from RBI in a swap arrangement, which they used to buy crude oil from international markets.
RBI offered a better rate of 25 basis points over the then market rate, said a bond dealer with a public sector bank.
Since the previous financial year, when the number of fund managers for EPFO and NPS climbed, the government had issued oil bonds worth nearly Rs 76,000 crore where the PFs could invest. While a majority of it was offloaded in the market to generate liquidity, even during the first quarter of the current financial year, the three public sector players have sold Rs 4,500 crore of bonds. Indian Oil has sold bonds worth around Rs 400 crore, while Bharat Petroleum has sold around Rs 4,000 crore. Hindustan Petroleum could not be reached for comment to ascertain the extent of sale undertaken this year.
“This year so far, the oil marketing companies have not sold as much as last year, since the pressure due to global prices and liquidity are lower,” said an official dealing in bonds.
Spreads shrink on growing interest
The effect of rising interest on oil bond portfolios has meant the spread, either on market rates or government paper for a similar maturity profile, has shrunk. In November, the spread was around 75-80 basis points over the comparable government bonds. Now, these are around 20-25 basis points.
While Life Insurance Corporation of India was a significant investor in the past, its interest at this point of time is limited, as the spread is small.
Banks are not enthused to pick up this paper, since any investment in available oil bonds is eligible for calculating the Statutory Liquidity Ratio (SLR). For LIC and other insurance companies, liquidity is also important. At a 20-25 per cent spread, interest is coming only from PFs. At a 50 basis point spread, LIC would come in, dealers said.
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