Psu Divestment To Affect Pension Fund Investments
The divestment of public sector undertakings (PSUs) will impact the Rs 90,000 crore pension fund market as fund managers will have to make necessary changes to their respective portfolios in the case of investments in PSU debt paper.
Ever since pension funds were allowed to invest in PSU bonds five years back, many fund managers have shown preference for these over investments in government security.
The government is looking into the issue in view of the forthcoming divestments in leading PSUs -- Mahanagar Telephone Nigam, Videsh Sanchar Nigam, IBP, National Aluminium Company, Indian Petrochemical Corporation, and Bharat Aluminium Company. The Insurance Regulatory and Development Authority (IRDA), which is framing the new regulations for pension reforms, is also looking at avenues for investment by fund managers.
Fund managers are at a loss as to whether the change in the status of PSUs into private entities would result in their having to dump the bonds in the market. Alternatively, in order not to negatively impact the bonds market, fund managers might be told not to make further investments in PSU paper.
As the IRDA perceives that the Indian market is not ripe for greater investment in equity, this leaves little avenues for investment of pension funds. The OASIS (Old Age Social and Income Security) report had highlighted that pension funds ought to invest a major portion in the equity market in order to benefit from higher returns.
To date, fund managers have shown preference for PSU paper over investment solely in gilts as the former offer higher coupon rates, often in excess of 100 basis points over sovereign debt. Incidentally, the majority of Rs 90,000 crore pension funds is invested in government security. This is because older funds have huge amounts locked up in gilts as, till five years back, pension funds were allowed to invest only in government paper.
According to the revised norms, the maximum cap on PSU bonds has been placed at 50 per cent of incremental funds, with the option given to fund managers to invest another 10 per cent of incremental capital in corporate debt. Only 40 per cent is mandatorily required to be invested in government securities.
"There is a need for more dynamic asset allocation as ratings keep changing -- PSU paper often gets upgraded and downgraded," said India Life Pension Services managing director Manish Sabharwal.
In light of the central government adopting a policy of withdrawing reserves from the PSUs prior to the sell-off, this would affect the intrinsic value and could impact the ratings as well.