The Hindu Business Line : Provident funds may get greater exposure to stocks

Proposed investments
Money may go into Sensex, Nifty stocks, term deposits of private sector banks, rupee bonds of World Bank and ADB and mutual funds of money market instruments
Lower exposure to Central and State Govt. securities proposed

Our Bureau

New Delhi, Sep 14

Non-government provident funds as well as superannuation and gratuity funds could soon be allowed greater exposure to the stock markets.

The Government proposes to revise their investment pattern set down in January 2005 and enhance the existing investment limits. It also proposes to make eligible new instruments where these funds could invest.

Notably, these funds could look at investing in shares of companies figuring in the BSE Sensex and NSE Nifty and in equity-linked schemes (ELS) of mutual funds regulated by the Securities and Exchange Board of India. Also, they could be permitted to invest in rupee bonds issued by multilateral agencies such as the World Bank and Asian Development Bank and in term deposits of even private scheduled commercial banks, subject to certain conditions.

While issuing the draft proposal, the Finance Ministry has sought comments within 30 days time, beginning September 10.

Till now, these funds are allowed to invest up to 5 per cent of their portfolio in shares of companies that have an investment grade debt rating from at least two credit rating agencies.

Increasing limit

Now, it is proposed to raise the limit to up to 10 per cent. The requirement of two ratings from two agencies will also to be reduced to one agency only.

The investment can also take place in shares of BSE Sensex and NSE Nifty companies and ELS of mutual funds.

BONDS

In the category of bonds of public sector banks and financial institutions and public sector companies, the existing investment limit of 25 per cent is to remain, but the scope of investments has been broad-based.

Now, the proposal is to also allow investment in term deposits of private sector banks, provided the private banks meet conditions of continuous profitability of three years; maintaining a minimum capital adequacy ratio of nine per cent; having net NPAs of not more than five per cent of new advances and a minimum net worth of not less than Rs 200 crore.

Over and above this 25 per cent limit, investments have been proposed in mutual funds primarily investing in money market instruments and in rupee bonds of multilateral agencies.

But total investments in bonds of notified public sector institutions, bank term deposits, mutual funds investing in money market instruments and rupee bonds of multilateral agencies can be, at the most, 30 per cent of the total portfolio of the investing agency.

The draft proposals also intend to reduce the overall allocation to Central and State Government securities and to dedicated mutual funds which invest in Government securities from 40 per cent to 35 per cent.

In January 2005, the Government had, for the first time, allowed non-government provident funds, superannuation and gratuity funds to invest in equity markets. It also then permitted these funds to invest in term deposits of public sector banks up to three years as against the then existing limit of one year.

It had also allowed funds to invest in the bonds of public financial institutions and public sector companies if these were rated as investment grade by two credit rating agencies. Investments were also allowed in collateral borrowing and lending obligations (CBLO) issued by Clearing Corporation of India Ltd and approved by the Reserve Bank.