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BJP's manifesto ignites market sentiment - Views on News from Equitymaster
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  • Aug 16, 1999

    BJP's manifesto ignites market sentiment

    According to newspaper reports, the Bhartiya Janata Party (BJP) is likely to propose in its Election manifesto that if it were to retain power, it would permit Provident Funds and Insurance companies to invest in equity markets. This has come as music to the ears of fund managers and stock market intermediaries alike.

    Earlier, there was stiff resistance to the move, as the employees feared that the private management of the funds would breed corruption and produce sub optimal returns. The resistance to such a move has been considerably been diluted over the last couple of years, mainly due to the improved performance of private funds.

    Overall the benefits of such a move would be considerable. However, given the track record of aspiring political parties, it cannot be said with certainity whether the BJP, if elected, would actively pursue the implementation of such a policy.

    The Employees' Provident Fund Scheme of 1952, covering over 20 m employees, currently has a corpus of over Rs 600 bn (US$ 13.7 bn). The investment rules of the scheme have so far limited avenues of investment to government securities and other notified debt instruments. Insurance companies too have a very large amount of funds that are presently invested in such instruments as are specified by the government. In FY97, Life Insurance Corporation had invested just 9% of its total investments in private sector debt and equity.

    Due to these limitations, provident funds typically generate returns linked to the interest rates prevailing in the economy. In recent years, yields have averaged about 12%. However, due to a fall in interest rates, these returns are likely to decline to 10.5% - 11%, as against the 12% return that the government has to pay to employees covered under the scheme. On a real basis, historical returns generated by the fund are approximately 2.5%. These returns compare poorly with returns generated by other asset classes.

    The BJP has considered this move primarily to improve returns generated by provident funds and insurance companies. The step will also give the private sector access to this large pool of funds. Assuming that fund managers are permitted to invest even 5% of their funds in equities, an infusion of almost Rs 30 bn into the capital market is likely. The movement of such large funds into equities will ignite interest in the stock markets.



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