EPFO all set to invest in infrastructure debt funds

EPFO all set to invest in infrastructure debt funds

NEW DELHI: In a big boost for India's trillion-dollar infrastructure development ambitions, the country's largest pension fund - the Employees' Provident Fund Organisation - is finally ready to route some of its $100 billion corpus into the cash-strapped sector through Infrastructure Debt Funds or IDFs.

Such long-term savings would be crucial for building new infrastructure that faces severe funding constraints, with banks and developers having little room to deploy fresh funds into long-gestation projects that are hampered by red tape.

IDF is the government's big idea to provide long-term funds to infrastructure projects, and the finance ministry has been trying to route insurance and pension savings into these funds as they can be an important source of stable and, more importantly, domestic money.

Since late 2012, the ministry has been pursuing the idea with the insurance regulator IRDA and the labour ministry, which oversees the retirement savings of over 6 crore formal sector workers parked with the PF office. The provident fund department, also known as EPFO, is now veering around to the finance ministry's point of view.

"The IDF is similar in nature-though with a different structure-to bonds of longer tenure issued by Power Finance Corporation or Rural Electrification Corporation which we already invest in," a senior official in the EPFO told ET. "We can now invest in bonds with tenures up to 25 years, which enables us to consider IDF investments," he said, referring to recent changes in EPFO's investment norms approved by its board.

Under the new norms, the maximum tenure for AAA-rated PSUs has been raised to 25 years from 15 years, and to 15 years from 8 years for AA-rated PSUs. AAA ratings denote the highest level of safety for bond investments.

With EPFO opening up its Rs 5,00,000-crore corpus to IDFs, fresh money could trickle into infrastructure. Around 3,000 company-run PF trusy with EPFO's investment norms, could follow suit. EPFO's move will also serve as a cue for other gratuity and pension funds run by India Inc and the National Pension System run by the Pension Fund Regulatory and Development Authority (PFRDA). Together, these funds manage another Rs 2,00,000 crore.

"We will judge IDFs on the basis of security and suitability for our investment portfolio," the EPFO official said, adding that the retirement fund would only invest in these infra debt funds provided they get a credit rating of AA or AAA. "Unless we get some comfort and security, we wouldn't want to lock in our funds for 25 years, so a good rating is important," he said, citing EPFO's recent investment in bonds issued by the bankrupt national carrier, Air India, on the basis of a sovereign guarantee.

As of now, EPFO is leaning towards investing in IDFs set up by non-banking finance companies that are registered with the Reserve Bank of India instead of the three Sebi-registered IDFs that have been launched recently.

"Infrastructure is a highly risky sector and we don't want to take on execution risks which seem to be implicit in the model adopted by Sebi-registered IDFs," the official explained. "By contrast, IDFs under RBI's watch would invest in infrastructure projects that are already executed, so their returns may be low, but the risks are lower too," he said.