PFs exit IFCI due to post-merger uncertainty

Provident Funds (PFs) en masse are withdrawing their investments in IFCI. This is due to the fear that after the merger of IFCI with Punjab National Bank (PNB), the coupon on the IFCI's paper may fall sharply.

PF trustees and managers are rushing to take advantage of the beleaguered financial institution's latest offer to redeem and prepay its non-SLR (statutory liquidity ratio) bonds.

Total PF investment in IFCI could be over Rs 5,000 crore. About 10 to 15 per cent of many PFs' corpus is invested here. Only those PFs who have invested up to Rs 1 crore in IFCI can withdraw their fund.

The government's proposal to merge IFCI with PNB has raised fears among PF managers that this will trigger a further fall in the rate of interest on IFCI bonds.

"Considering PNB's ability to borrow at about six per cent, it is possible that the institution would retire old debts post-merger and reborrow at market-related rates," said Amit Gopalan, assistant vice president of India Life. India Life manages well over 50 PFs, with assets under management to the tune of Rs 500 crore plus.

There is no demand for IFCI paper in the secondary market and the brokers are asking for a yield of 12-13 per cent even as yield on IFCI bonds stands at nine per cent. This means PFs need to take a hair-cut if they choose to offload the bonds in the secondary market, said Gopalan.

Many investors have thus opted for prepayment of their investments in IFCI even as this would result a drop in overall returns, making it all the more harder for PF trustees to match the stipulated 9.5 per cent annual return on funds.

IFCI has started repaying investors of bonds that were due for redemption in November 2003, said Gopalan. Many PFs have also forwarded their bond certificates that will come up for redemption in 2005-06 as they feel it wiser to exit from IFCI today, he added.

Last year, IFCI wrote to PFs to restructure their investments by elongating the maturity of the bonds by five years.

It also unilaterally brought down the interest rate on the bonds to nine per cent despite many PF managers declining to accept a hair-cut in their investments. The contracted rate of interest on the bonds was earlier 16-16.5 per cent.