The Enron imbroglio, which wiped out the lifetime savings of its employees as the provident fund trustees invested heavily in the company's shares, will not be a feature replicated in India. This follows trustees of exempted trust funds of Corporate India being highly adverse to investment in corporate debt paper.
"Even though exempted provident funds are allowed to invest in corporate debt up to 10 per cent of incremental funds, most trustees are adverse to such investments," A Mahendra Raju, regional provident fund commissioner, said. Citing the example of blue chip companies in the petroleum industry, Raju said that professional investors acting as trustees of exempted provident funds have not invested in even AAA corporate bonds, and have put 100 per cent of incremental funds into government or government-guaranteed paper.
Retirement trusts are required to invest at their discretion in private sector bonds. Many trustees' perception of credit risk is high in the case of corporate debt compared with government paper, Amit Gopal, assistant vice president of India Life Asset Management Company (ILAMC), the investment arm of India Life Hewitt, said.
"Trustees look at putting funds at the highest possible yields but sound corporates are able to place debt at less than 8.5 per cent," Gopal pointed out. Further, provident funds can invest in corporate debt only if it has been rated at least AA/AA+ by two rating agencies. Most corporates however, to save on costs do not go for two ratings, Gopal added.
"Very few corporations have tapped provident funds, with GE Caps, HDFC, Telco and IL&FS being the prominent ones. These are highly rated corporates, which borrowed at very fine rates. Only those provident funds which managed to invest in institutional debt at higher rates preferred investing in these bonds," Goyal said.
Many of these bonds are floating rate bonds, which acts as a hindrance for provident funds, which need to pay out 9.50 per cent as per the statutory ratio, and this is too high for a AAA corporate to borrow at, he added.
At the same time, state-run corporations have historically been seen to represent near sovereign debt with the possibility of a government bailout in case of a default, said Gopal, whose firm advises a number of exempted funds.
The Madhya Pradesh State Electricity Board's (MPSEB) exempted provident fund, defaulted in payment of Rs 100 crore to its bond holders, the regional PF commissioner said. As a state undertaking it had recourse to make good large losses through international funding, he pointed, adding that the SEB made good the losses through assistance from the Asian Development Bank.
The same does not hold true for private sector bonds, which does not have such recourse to funding. Of late, however, this perception has undergone a change with defaults and delays in payment by state government-owned entities, a trustee from a leading exempted fund belonging to a textile conglomerate, said.
Faced with a Catch 22 situation in having to meet the statutory rate of return of 9.5 per cent, many corporates, which had opted for exemptions five years back are finding it difficult to manage their investments and still give a return of 9.5 per cent, said Raju. Forced to recoup the shortfall from the company, some have gone back to the Employees Provident Fund Organisation, he added.
