EPFO halts investment in private sector bonds due to NBFC crisis

At present, the EPFO is mandated to invest 20-45 % of its incremental funds in debt-related instruments

The Employees’ Provident Fund Organisation (EPFO) has decided to halt investment in private sector bonds, following defaults triggered by the crisis in non-banking financial companies (NBFCs).

The EPFO wrote a letter to its portfolio managers — UTI Asset Management Company (AMC), ICICI Securities Primary Dealership, Reliance AMC, and HSBC AMC — on Thursday to convey its decision.

“It is to inform that due to the recent downgrades and defaults in some private sector bonds and heightened risk, investments in bonds of private sector companies was revisited,” the EPFO said in the letter.

“Accordingly, it has been decided by the competent authority to withhold any further investments in private sector companies’ bonds till further orders,” the letter added.

The move is aimed at preventing losses in such debt-related instruments as many private companies have seen a string of defaults and credit downgrades.

At present, the EPFO is mandated to invest 20-45 per cent of its incremental funds (of around Rs 1.5 trillion) in debt-related instruments, according to its pattern of investment notified by the labour and employment ministry, following consultations from the Ministry of Finance. This includes both private and public sector bonds issued by commercial banks, mutual funds, and NBFCs.

An EPFO official said every year its investments in private sector bonds are in the range of Rs 25,000-40,000 crore. “We want to protect the provident fund savings of millions of employees. We have to be cautious with our investments,” the official said.

Further, to safeguard its investments in public sector unit bonds, the EPFO has told the portfolio managers to ensure they take credit ratings from at least one of these four: CRISIL, CARE Ratings, Icra, and India Ratings and Research.

EPFO’s fund managers are supposed to take into consideration ratings from any two agencies in India before investing in bonds or other such instruments. There are seven credit rating agencies registered with the Securities Exchange Board of India at present. The minimum rating of such investments is ‘AA’.

The crisis in Infrastructure Leasing & Financial Services as well as top NBFCs such as Dewan Housing Finance Corporation has led to rising risks for investors in this sector.

Last year, the EPFO had decided to pare minimum investment in corporate bonds from 35 per cent to 20 per cent due to paucity of such instruments in the market.