India’s Employee’s Provident Fund Organisation (EPFO), the INR5 trillion (€59 billion; $80 billion) national pension plan, has finished selecting 10 private domestic companies for investment in their bonds, the fund has told Infrastructure Investor. EPFO will be allowed to invest 10 percent of its investible assets, or INR60 billion per year, in these ten companies' bonds, most of which are related to infrastructure.
According to K.L. Goyal, the regional commissioner for EPFO in Mumbai, the organisation had a rigorous selection process for the 10 companies. Each had to have had a track record of 10 years, of returning about 25 percent on average, have assets under management of INR50 billion, have their bonds rated ‘AAA’ by two agencies, and to have never violated any laws.
Among the selected companies are ACC, Grasim Industries, Great Eastern Shipping, Reliance Capital, Reliance Industries, UltraTech Cement, and Larsen & Toubro, according to Business Standard. Though not infrastructure investment companies per se, most of these companies have some connection to India’s giant infrastructure market. Reliance Capital, for example, raises both private equity and mutual funds for investment in infrastructure. The names of the remaining three companies were not immediately available.
Historically, EPFO’s investment scheme has been weighted toward domestic infrastructure, Goyal told Infrastructure Investor. The Indian government has dictated that 25 percent of EPFO’s investments must be in central government bonds, 15 percent in state government bonds, and 30 percent in public sector undertakings, most of which are infrastructure projects or firms at least 51 percent-owned by the government.
However, the remaining 30 percent of EPFO’s assets can be allocated to any of the three categories, and EPFO has generally favoured the infrastructure-heavy public sector undertakings, because they give the highest returns. Past projects have included large flyovers and New Delhi Airport, Goyal said.
However, EPFO’s decision to go into the bonds of these 10 companies also reflects its investment thesis: it primarily gets exposure to infrastructure through the public markets rather than private funds, preferring to invest in the company that operates in infrastructure rather than the infrastructure itself. Goyal explained that this is a safety measure for the national pension plan.
“We are interested in the return of capital, not the return on capital,” he said. “Whatever money we’re investing, we must be sure it will come back.”
Over the past five years, EPFO has invested about INR300 billion in infrastructure projects and companies, including in the public markets and four joint ventures with domestic fund managers: an HSBC asset management company, Reliance Capital, ICICI Securities, and the State Bank of India. As returns are being squeezed, however, EPFO is having to look at other avenues to get the returns it will need for its liabilities, Goyal said, adding that private bonds were one such step.