The Employees' Provident Fund Organisation (EPFO) is likely to pick up bonds from three new public sector units (PSU) this year.
Sitting on a huge corpus of Rs 4.5 lakh crore and accruing over Rs 50,000 crore worth of fresh funds every year, EPFO had helped distressed government companies raise funds in the past as well. Last year, it had bought government-guaranteed bonds worth Rs 4,200 crore from Air India.
According to EPFO sources, the retirement manager may invest in Damodar Valley Corporation (DVC), which has issued Rs 2,600 crore worth of bonds, Food Corporation of India or FCI (Rs 5,000 crore), and Mahanagar Telephone Nigam Limited or MTNL (Rs 3,000 crore). The DVC and FCI bonds are for 15 years, while MTNL bonds are for a tenure of 10 years.
The EPFO was to buy these bonds from the secondary market, as and when it could free funds for the purpose, sources added.
In 2011-12, MTNL made losses to the tune of Rs 4,100 crore. According to a recent Department of Telecommunications note, MTNL's financial problems were partly because it had to pay the government after the 2010 auction price was applied to their spectrum holding in the 3G and broadband wireless access (BWA) waves. The spectrum was allocated to MTNL prior to the price fixation.
DVC raised Rs 2,600 crore through the private placement of 15-year non-convertible redeemable CARE AAA-rated bonds, guaranteed by the Government of India, through the power ministry.
The funds will be used to finance the company's thermal projects. The bonds will be redeemable in three phases of 30 per cent each during 13th and 14th years and 40 per cent during the 15th year. The issue opened on March 21, 2013 and closed on March 25, 2013.
State-run FCI said it had raised Rs 5,000 crore through bonds, which were over subscribed 1.77 times, to improve its cash flow. It issued bonds at an interest rate of 8.62 per cent for 10 years and 8.80 per cent for 15 years. The issue opened on March 21 and closed on the next day.
EPFO is not worried about the financial status of the PSUs since these bond issues are guaranteed by the government. For instance, it is earning annual returns of 9.28 per cent on the bonds of Air India, in which it invested late last year.
Since these bonds are guaranteed by the government, EPFO treats these PSU bonds on a par with government securities, which are risk-free. The returns of other PSU bonds (of 10-year tenure) during March this year were in the range of 8.55 per cent to 8.74 per cent. HPCL's five-year bond gives the highest return 8.76 per cent.
According to K P Jeevan of Karvy Stock Broking, as long as the PSU bonds are government backed, they are risk-free. DVC is double- or triple-A rated by virtue of being guaranteed, he points out. "When a paper is backed by the government, cash flow is carved out of the budget of the government. Whether the government should back some of these, however, is a different question altogether," he adds.