Govt extends SDS, eases terms of withdrawal

NEW DELHI: The government also liberalised the terms for withdrawal of deposits from the SDS. The SDS was scheduled to mature on June 30 this year. A decision on the scheme is crucial to provident funds regulated by the Employees Provident Fund Organisation (EPFO) considering that close to 80% of their funds aggregating over Rs 40,000 crore is parked in this scheme. The government has now decided not to allow any new investment in the scheme after June 30.
Now, coupled with the decision to allow a cash pay-out on the interest earned on the SDS, instead of reinvestment of the interest in the SDS itself, and a more liberal policy on withdrawals by subscribers, the government reckons that the corpus of the scheme will get depleted gradually. The interest paid out will have to be invested, as per the investment pattern prescribed for provident funds, in government debt, public sector /financial institution bonds. Private corporate debt rated AA by at least two credit rating agencies also qualifies for a small proportion of EPF investments. The repayment of the outstanding balance will be done later in a phased manner by the government through the issue of dated securities to the provident funds linked to current market yields. The amount and the maturity will be decided later after talks with subscribers.
The Finance Ministry’s intention is to issue dated securities on which the coupon will be linked to the prevailing market yields.
This implies that the provident funds will have to reconcile with lower returns on such securities, something which the EPFO and the Labour Ministry may not be comfortable with. The Trustees of the EPFO have been resisting all efforts to cut the rate on provident funds from 9.5% to 8% in line with the return offered by other small savings instruments. A further cut in the return on the dated securities which is to be issued against the repayment of the SDS outstanding balance will mean that the overall yield will be pulled down for the provident funds.
The proposal now is to issue marketable securities of varying maturities depending on the debt profile of the Government. The maturity will be structured in such a way that the government does not have to reckon with a problem of bunching of repayments. The other option open to the government if there is resistance from the provident funds, is to issue special securities with a marginally higher coupon than on government paper at present.
However, that will defeat the intention of the government to finally wind up the scheme in the medium term. It is quite likely that the securities will be long dated given the preference of the provident funds. In any case, the maturity will not be less than five years, officials indicated.