EPFO warns exempted provident funds, asks them to pay for wrong investment decisions

MUMBAI: Employees' Provident Fund Organisation has warned exempted provident funds that losses arising out of wrong investment decisions have to be compensated, four people familiar with the matter told ET.

The warning comes in the wake of a series of defaults in the debt market, especially after the Amtek Auto fiasco. Unlike EPFO, standalone, or exempted PFs, manage retirees' funds individually by running trusts.

"The exempted establishments are supposed to recoup losses incurred by the trusts from their own sources whenever there's any loss to the trust due to bad investments," said an official communiqué. There are over 3,000 such exempted PF trusts with a corpus size of more than Rs 2 lakh crore against EPFO's overall corpus at about Rs 6 lakh crore, according to an industry estimate. Those PFs obtain incremental contribution of anything between Rs 15,000 and Rs 20,000 crore per year.


They are mandated to invest up to 45% of their annual inflows into corporate bonds, not rated below AA. The annual interest rate is about 8.75%. "Many a time exempted PFs are misled to subscribe to poor corporate bonds in lure of higher yields," said Ajay Manglunia, head, fixed income, Edelweiss Securities. "With the EPFO caution, this practice would come down drastically."

"One needs to be extra cautious when dealing with retirement funds, as they are for long term investments and not trading," he explained.

For instance, at the time of issuances, Amtek, then rated AA, was offering rates in the range of 10.25-11.25%, at least 200-300 basis points higher than top-rated corporate bonds. The company later defaulted and was downgraded to ‘D' category a week ago.

"Amid falling sovereign bond yields, exempted trusts are increasingly looking to invest in corporate bonds, which would yield higher returns to their portfolio," said a Mumbai-based broking and investment banking house. After the EPFO communiqué, they are only looking at good quality credit instead of blindly buying anything at the cost of higher yields, dealers said.