Archive for September 17th, 2007

Pension Funds allowed more exposure to equity

September 17, 2007

Finance Ministry has revised the investment pattern of non-govt. pension funds.

The break up (asset allocation) is as follows:

                                                                    Earlier     Revised
1. G-Secs or G-Sec based MFs               25                  35
2. State Govt. Bonds                                 15                   –
3. PSU/PSB Bonds                                    25                 25
4. Any sub-category in 3                         30                  30
5. Equity                                                     5                    10

Total                                                          100                100

Explanations:

  • G-Secs are govt bonds. Earlier 1 & 2 were seperate and now they have been clubbed as one. So, a PF can invest all 35% in State govt secs or can adopt a mix. However, in MFs maximum investment is 5% i.e. remaining 30% have to be bought from market. This is a welcome move as it gives the fund manager more leeway to invest.
  • Atleast 25% of (1) is to kept in an active portfolio
  • The 3rd category has been expanded.
    a) Now, PFs can invest in time deposits of private banks as well. As Public Sector Banks’ time deposits were allowed, Pvt Banks time deposits are also allowed.

    The Pvt banks allowed – banks must meet conditions of continuous profitability for three years; maintaining a minimum CRAR of 9%; having net non-performing assets of not more than 5% of the net advances and having a minimum net worth of not less than Rs.200 crores.

      b) Money Market MFs
     
c) Rupee Bonds issued by ADB, World Bank etc.

  • So now, there are 5 asset categories in (3)-
    i) PSU Bonds/PSB Bonds
    ii) Public Banks/ Pvt Banks deposits
    iii) CBLO
    iv) MMMF
    v) Rupee Bonds issued by ADB etc.
  • In 4, the trust can invest 30% in any of the 5 categories in (3)
  • Equity- Shares of companies that have an investment grade debt rating from at least one credit rating agency/ Shares of companies figuring in BSE Sensex and /or NSE NIFTY 50 and / or in equity linked schemes of mutual funds regulated by SEBI.

I think it is a welcome move. Allowing more investments in equity market is welcome as pension fund money can help Indian markets become less dependent on Foreign Institutional investor.And then allowing PFs to invest in Rupee Bonds issued by ADB etc would provide more liquidity in this market and build confidence in this market.

However, I think something could have been done to address the corporate bond market. As of now, guidelines only allow to invest in bonds of public sector bodies and public sector banks. This could have been expanded to bonds of private sector as well.

Assorted Links

September 17, 2007

1. MR points to a new paper from Steve Levitt.

2. WSJ Blog points China is exporting inflation.

China’s shift from source of deflation to source of inflation appears to reflect a strengthening Chinese currency, upward pressures on wages and other costs there, and rising prices of energy and commodities used to make many Chinese goods.

3. Fin Prof points out hedge funds lure Professors.

4. Hamilton warns that a tsunami is round the corner.

5. Jaideep Misra points to an interesting paper on vehicle ownership.

6. ET has an edit on equity Exchange for SMEs. Meanwhile BSE is planning to revamp its SME platform.

7. AV Rajwade praises China.

8. Vinayak Chatterjee on soft underbelly of infrastructure.


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