The Employees’ Provident Fund Organisation (EPFO) will give LIC’s mega initial public offering (IPO) a miss. In sync with its very low-risk appetite investment approach, EPFO will continue to invest in equities through exchange-traded funds (ETFs) and not bet on individual stocks, an official source said.
As per the notified investment pattern, EPFO can invest its fresh accretions, amounting to around Rs 2 lakh lakh crore a year at last count, between 45-50% in government securities, 35-45% in debt instruments, up to 5% in short-term debt instruments, between 5-15% in equities and up to 5% in asset-backed, trust structured and miscellaneous investments.
However, within the pattern of investment, EPFO’s highest decision-making body — the Central Board of Trustees (CBT) — infuses certain disciplines in consultation with Finance Investment and Audit Committee (FIAC), a sub-committee of the CBT. Those set disciplines act as the guideline for investment. According to the present internal guideline, EPFO is prohibited from investing in equity of individual companies.
Aimed at maximising returns on its investments and paying higher returns to its subscribers for the accumulated deposits, EPFO has been investing in ETFs since August 2015 through ETF manufacturers —SBI-Mutual Fund and UTI-Mutual Fund and built up a sizeable equity portfolio. Between August 5, 2015, and March 2021, EPFO’s gross investment in ETFs was Rs 1,37,896 crore.
“As per our current policy, we can’t invest in LIC IPO. We don’t invest in retail equity. The extant pattern of investment permits investing in equity. But our board infuses certain discipline on the investment pattern that act as the guideline. Investing in IPO does not fall in that guideline,” said a source.
The source said that the guideline is unlikely to be changed in the next meeting of the FIAC and the CBT, which are mandated for investing in equities and in other instruments, scheduled in the second week of March.
The Central Board of the EPFO in 2015 decided to invest 5% of the total annual investments in ETF of Nifty and Sensex. Accordingly, investment in ETF started with effect from August 5, 2015. In September the same year, the board decided that allocation of Nifty based ETF would be 65-85% and the allocation to Sensex-based ETF would be 35-15%.
In 2016, the Board enhanced the allocation to 10% of the annual investments and in 2017, to 15%. Last fiscal, its investment was 14.2% of the incremental deposits.
For FY21, EPFO decided to liquidate some its investment in ETFs. This enabled EPFO to provide a relatively higher return (8.5%, same as in FY20) to its subscribers while allowing it to keep some surplus to act as cushion for providing higher return in future. There is no over-drawl on EPFO corpus last fiscal.
