The story so far: In March, the Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) had recommended an 8.5% interest payout to members for FY20 . At a meeting earlier this month, the CBT reiterated its recommendation, after a review, to the Centre. The payout would comprise 8.15% interest based on income from debt instruments and the balance 0.35% would be credited from the sale of a part of its investments in exchange traded funds (capital gains), subject to their redemption by December 31. The CBT also recommended that such capital gains be accounted for as income on an exceptional basis for 2019-20.
Where does the EPFO invest to generate returns?
The EPFO uses its corpus (estimated at ₹13 lakh crore-₹14 lakh crore in the last fiscal) to earn income from investments in debt instruments and equities. Investment in equities is capped at 15%. The remaining funds are invested in debt. The debt component helps the EPFO earn fairly predictable returns, while the equity component has risks associated with fluctuations in the stock market. Based on the EPFO’s earnings for the year, the CBT recommends in March an interest rate at which the payouts can be made. The final decision is notified by the Ministry of Labour.
What changed this time around?
At the CBT meeting in early March, the earnings for 2019-20 were discussed. Debt component expectations were more or less fixed and were in the range of ₹58,000 crore-₹59,000 crore. The ETF disinvestment process was expected to result in estimated capital gains of ₹3,000 crore. The interest rate recommendation, of 8.5%, was arrived at based on the estimated earnings. Typically, ETF dilution would have begun thereafter. But by the middle of March this year, equity markets were in free fall as the COVID-19 pandemic triggered a global selloff. It became clear that the anticipated earnings from ETF dilution could not be realised at the time. At a meeting of the CBT’s Finance, Investment and Audit Committee (FIAC), which took place later in March, it was decided that the equity dilution would be put on hold until the stock markets recovered. With the recent improvement in market conditions, the FIAC met again, followed by a meeting of the CBT. It was clear that the debt component had earned ₹58,000 crore. What remained was the equity component.
The CBT recommended that the debt component, or the returns that were already in hand, would facilitate a payout at 8.15%. The earnings from ETF dilution were projected at ₹2,700 crore. So, the CBT decided to retain its recommendation of 8.5%, of which 0.35 percentage points would be realised based on the sale of equity. This sale could happen any time now, depending on how the market performs, but within December 31. Once the dilution takes place and it becomes clear that returns were indeed as anticipated, the CBT would convey the same to the Labour Ministry, and from thereon to the Finance Ministry. On approval, the interest rate would then be notified.
Will EPFO make the payouts in two instalments?
No. For now, there is no decision to make payment in two instalments, according to a member of the CBT. Whenever the ETF dilution takes place, within this calendar year, the interest payout is set to happen in one shot.
Can the situation change?
It could, but seems unlikely as of now. For example, if the stock market collapses again, and if the ETF dilution does not bring in the expected returns, the 0.35% part of the interest rate may get reduced. However, the CBT member said currently there is nothing the Board foresees that could endanger the returns.
Published - September 13, 2020 12:57 am IST
