The government has finalised revised investment norms for non-government pension, gratuity and provident funds, under which a minimum of 5 per cent of the funds have to necessarily be invested in equity and related instruments - a move that would channel a minimum of 30,000 crore of the Rs6,00,000 crore provident fund corpus into the stock markets.
The revised norms provide a minimum investment ceiling for the categories of government securities, debt securities and equity and equity-related instruments.
Besides, it provides a new category of instruments, such as index funds, exchange traded funds, debt mutual funds and asset backed securities as also infrastructure debt funds, real estate investment trusts, infrastructure investment trusts, Basel III compliant tier-I bonds of banks and exchange traded derivatives as hedging instruments.
The new guidelines, according to the finance ministry, are based on the principle that the trustees should be given the freedom to exercise their fiduciary responsibility and the new norms will be notified soon.
A committee on investment pattern for pension and insurance sector constituted by the department of financial services under the chairmanship of G N Bajpai, ex-chairman of LIC and SEBI, had recommended that the trustees of pension funds need to exercise due diligence so as to provide sound and objective criteria on selecting any financial instrument.
Further, it also gives them greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to manage the portfolio, in terms of newer instruments and greater flexibility in investment limits.
The changes suggested in the new investment pattern, with effect from 1 April 2015, inter alia, include:
- Minimum and maximum limits for central and state government securities and government guaranteed securities to be fixed (with a separate maximum limit of not in excess of 10 per cent);
- Govt securities along with mutual funds, forming part of a single category to be allowed investment of up to 50 per cent of the investible funds (down from 55 per cent earlier);
- Provide for new category of instruments, such as index funds, exchange traded funds, debt mutual funds and asset backed securities and instruments such as, infrastructure debt funds, real estate investment trusts, infrastructure investment trusts, Basel III compliant tier-I bonds of banks and exchange traded derivatives for hedging;
- Permit investment in term deposit receipts of even less than one year duration, issued by scheduled commercial banks subject to the specified financial criteria;
- Prescribe investment of minimum 5 per cent and up to 15 per cent of the investible funds in equity and equity related instruments; and
- Strengthen credit rating requirements for some financial instruments from ''investment grade'' to ''AA'' category, keeping the protection of interests of subscribers, in view.
The new guidelines stipulate that the prudent investment of the funds of a trust / fund within the prescribed pattern is the fiduciary responsibility of the trustees and needs to be exercised with appropriate due diligence. The trustees would accordingly be responsible for investment decisions taken for the investment of the funds.
The trustees will have to take steps to control and optimise the cost of management of the fund.
The trust will ensure that the process of investment is accountable and transparent.
Due diligence will be required to be carried out to assess risks associated with any particular asset before any investment is made by the fund in that particular asset and also during the period over which it is held by the fund.
The requirement of ratings, as mandated in the notification, merely intends to limit the risk associated with investments at a broad and general level.
This, the government added, should not be construed in any manner as an endorsement for investment in any asset satisfying the minimum prescribed rating or a substitute for the due diligence prescribed for being carried out by the fund / trust.
The trust / fund should adopt and implement prudent guidelines to prevent concentration of investment in any one company, corporate group or sector.
The new investment pattern would come into force from 1 April, 2015, that is, from the financial year 2015-16. A comparison of investment pattern of 2008 and that of 2015 is as below:
Revised norms for pension fund investments from 1 April 2015
|Instrument || |
Investment Pattern of 2008
Investment pattern to be notified with effect from 1 April 2015
|Government securities || |
Up to 55%
Minimum 45% and up to 50%
|Debt securities and term deposits of banks || |
Up to 40%
Minimum 35% and up to 45%
|Money market instruments || |
Up to 5%
Up to 5%
|Equity and equity related instruments || |
Up to 15%
A Minimum of 5% and up to 15%
|Exchange traded funds/ index funds || |
No such category
Exchange traded funds, index funds and derivatives are part of the a minimum 5 per cent and up to 15 per cent limit for equity and equity related instruments
|Asset backed securities, units of real estate / infrastructure investment trusts || |
Up to 5% limit