It’s unlikely anyone will complain about liquidity crunch in the stock markets next year. The government has relaxed investment norms for private sector managed provident fund (PF) and superannuation trusts – who manage a combined Rs 5 trillion worth funds of 40 million employees. According to the revised norms, which will come effective from next financial year (April ‘09), they can invest up to 15 per cent of their funds in shares of companies on which derivatives trading is allowed at Bombay Stock Exchange and National Stock Exchange besides equity-linked schemes of mutual funds. There are about 228 single stock futures traded in the F&O segment of NSE, with 39 more to be added later this month.
This has come even as earlier the government planned to allow these PFs to invest upto 10 per cent(from the existing 5 per cent cap) of their investible funds in shares of companies that had an investment grade debt rating from a credit rating agency.
The other changes made in the investment pattern include merger of central and state government securities and units of gilt mutual funds into a single category and allowing investment up to 55 per cent of the investible funds into them.
At the same time the new norms allows a flexible ceiling for various category of instruments instead of fixed investment cap at present; provides new category of instruments, such as rupee bonds of multilateral funding agencies, money market instruments and permitting investment in term deposit receipts of not less than one year duration issued by scheduled commercial banks.
Besides the norms give trustees greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio. They will also have the freedom to exit from a rated financial instrument when their rating falls below investment grade as confirmed by one credit rating agency
The relaxation in investment norms for PFs comes on the back of a recent liberalisation for the sector. On July 30, the government allowed private players HSBC, Reliance Capital and ICICI Prudential to manage the incremental funds of EPFO, subscribed by over 40 million employees. This brought to an end the monopoly of state-run State Bank of India in this game.
How Much Money?
But does this mean major fund infusion in the coming months? If past trends are anything to go this may not necessarily happen. According to a report, very few of the funds allowed to invest in equities have even utilised their cap of 5 percent. Even those funds, which do invest in equities, have an exposure of only 1-2 percent. Add to it the recent crash in secondary market which has shaken even big bulls and the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9 percent. In this context, it is unlikely that these funds will start investing heavily in the market.
One of the problem areas is the returns of 8.5 percent which these funds are supposed to guarantee. In case the fund fails to generate this much return the employers are expected to provide for the rest. Experts believe that if fund managers are to shift to equities then this guaranteed 8.5 percent clause needs to change.
At the moment, PF returns have been above the mandatory mark. Investments during FY’08 , in particular, have given returns of over 9 percent while those of 30-year old trusts, which have been managed effectively, have consistently given returns of 8.5-8.8 percent.