EPFO must take the PSU route to get better returns for its subscribers
There’s merit in the move by blue-chip state-run public sector enterprises’ (PSEs) to meet their long-term debt needs from over Rs 6 lakh crore cash pile lying with the Employees Provident Fund Organisation (EPFO). EPFO’s Central Board of Trustees must seriously consider investing its liquid cash in profit-making and dividend-paying blue chips with majority government equity and control. Given the shallow bond market in the country, PSUs have very limited options to mobilise debt funds. They have been forced repeatedly to approach scheduled commercial state-run banks to meet their long-term debt needs. Power, coal and oil companies, especially NTPC, ONGC, Power Grid, Coal India, Bharat Petroleum, Hindustan Petroleum, PFC, Rural Electrification Corporation, have a credible track record in both the equities and debt market.
While there’s modest scope for tapping the retail bond market for long-term debt financing, PSUs taking recourse to EPFO funds, will help in taking pressure off the banks. It will allow banks to focus more on short and medium-term loans, as well as free up funds to meet working capital needs of the corporate sector. EPFO should not limit itself to taking exposure in debt portfolio of PSUs, but may even contemplate buying into their equity and benefit from a huge dividend payout. Since all the nine PSUs are listed companies with diversified holding, EPFO may consider floating an investment arm to buy into PSUs’ equity like the LIC.
It makes even more sense for EPFO, given that currently it invests most of its cash surpluses in central and state government debt paper. As a precursor to enhancing 10 per cent cap on EPFO taking exposure in stock market, the state-run pension fund would do good in taking larger exposure in both equity and debt portfolio of PSUs. This will not only enhance returns for EPF subscribers, but also ensure safety of their lifetime savings. Given that the yield on 10-year government bond paper has nose-dived to 6-6.44 per cent post-demonetisation, it’s importance can scarcely be overstressed. Even 2-2.5 per cent higher yield from PSUs will enable EPFO to make 8.5 per cent interest payout to its subscribers possible without dipping into its reserves or seeking government support.
In the ensuing budget, finance minister Arun Jaitley may consider rolling out a policy framework for productive deployment of EPFO cash pile, better returns for subscribers and meeting long-term funds requirement of PSUs. Investment in blue chip energy PSUs by EPFO will also enable the country to hasten Modi government’s move to ensure energy security, insulate the domestic oil prices from volatility in global markets and fuel the expanding economy. The only issue at stake here is that PSUs must deploy EPFO funds into productive assets without much time lag. For this to happen, they will have to ready a basket of bankable projects and assets they propose to acquire abroad. EPFO funds release must be linked to realising these projects and assets acquisition.
In the past, government has had to nudge several cash-rich PSUs with huge reserves to make special dividend payouts, given the missed deadlines on projects implementation, time and cost delays or assets acquisition. The New Pension System (NPS) has made a mark by investing up to 50 per cent of subscribers’ savings into corporates and stock markets. EPFO must take the PSU route in a measured way to add value for its subscribers. The only rider could be that PSUs take the entire risk of onward investment of EPFO funds, as in the case of external commercial borrowings or masala bonds floated in international market.­