()

EMPLOYEES' PROVIDENT FUNDNEW DELHI

. lOlst Meeting-ofiheII

FINANCE AND INVES~MENTCOMMITTEE II

I,

[CENTRAL BOARD OF TRUSTEES, EMPLOYEES' P~OVIDENT FUND]

onI

26 /11/2010 at 3.00 P~M.

VENUE:ICOflference Hall,

~rd, Floor, EPFOi· Head Office,

Bhavi~hyaNidhiBhawan,14,B~kaiji Cama Place,

Nfw Delhi - 110066.I

I,

( .,I

r:('

I\

Ii .

EMPLOYEES' PROVIDENT FUND ~GANISATION

101meetingo(FIC 26.11.2010

('

(!

!

AGENDA BOOK I

101st Meeting of the Finance & Invesbnent co1mmittee, CST, EPF

Date: 26. 11 .2010 INDEX OF ITEMS \

Time: 3.00 P.M

\ ..

Agenda I Page No.Item ,

,

No.1. Confirmation of the Minutes of 100th Meeting of 1he finance 3-8and Investment Committee held on 25.08.201 p at EPfO

Headquarter, New Delhi ,

I,

2. Action Taken Report on the recommendations of the 100tn <j -10finance and Investment Committee ;

3. Review of Investments in respect of Provident fUllld;11- 15Pension fund & EDU fund up to 30.09.2010 "

i,,

4. Performance evaluation of the Portfolio Managers for the 16-Ybperiod ending 30th September 2010.,,I

I

5. Shifting investment from IIfCL Bonds to SOls. Y1-y86. Revised Estimates for the year 2010-11 and Budget ~CjI

Estimates for the year 2011-12 for the Employees'Provident fund Scheme 1952, Employees' Pensio(l Scheme1995 and ~mployees' Deposit Linked Insurana1 Scheme1976 - wi" be sent separatety

,

I,,

7. Relaxation in Investment Guidelines for Invesbnent in50-51I

Bonds/Securities of PSUsjPSBs/PSfIs- EXPAN~ION OfliMITS TO NETWORTH I

,

8. Relaxation in Invesbnent Guidelines to increa~ ~imit and 52-53expand the basket of instruments in Pvt. Sector I

9. Investment in dual AAA (SO) rated instruments 6010. Any other item with the pennission of the chair

I

('t:

(\

('

(

( .

I--~

r-- \,

()

('\

(

(,

( ~

( ;

( I

(

c

Item No.l:- Confirmation of the Minutes of the l~th meeting of the Finance&. Investment Committee held on 25111 August 2010 at EPFO,HQs,New Delhi. ' \ .

I

Minutesof lOOth Rnanceand Investment Co~mittee meeting held on 25thAugust 2010 were circulated vide letter No Inves~.I/l(lOO)/AC/2010/21507-19dated 29.9.2010. No Comments have been ~ived on the minutes of theabove said meeting. Copyof the minutes is endosrt as Annexure - A to thisitem.

Minutesmay be taken as confirmed.

r',('~.r:(~

t

cr'rc'c(,

c(

C(I

C'(

( ,

( '.

(

(

(

l

"

Final Minutes of the l00th Meeting of the Finane, & Investment Committee ., " 'held on 25;.08.2010 'i ' ' , ,

'C, ' ' l, "', " . '" 'The 100th meeting of the Finance and fnvestment Com~~ee, Central Board of Trustees;

Emplovees' Provident Fund was held at 11~00'A.~ onAugust 2f, 2010" in the Conference Room;,3rd floor, EPFO Head Offlce~NeW Oethi: ' ",,' i " , ',; " , ' ,

.' . " ..I:I

(a) The following were present in the meeting:

1 Shri S. Chatterjee Chairman, Finance arid Investment ¢omrnittee~ car, EPF,and CentralProvident Fund cOmmissioneriEmp~yeeslProvident Fund

• I"

.organisation, Head Office. ;

2. Shri S KVerma Director (Sociar,~~urityl, Ministry o. Labour and Employment, ,Government of India.

,,

3. Shrj A D Nagpal Member,CBT,fPF (Employees'Representative). . . i

,

4. Shrl Santosh Saraf Member, CBT~EPF(Employers' RepreSentative)

S. ShriSharadPatii Member, CBT,EPF{Employers' Reprefentative}

(b) The following also attended:

1. Shri K.l. Goyal, RPFC-I {IMC}

2. Shri R.K.Singh, RPFC-I (F&A)

3. Shri V. Shyam Sunder, Director {Audit}

4. Shr; V.Ranganath, RPFC -II (Investment)

5. Dr. A.K.Singh,RPFC-II(WSU)

6. Shri RajivBisht, RPFC-II(lMC)

7. Shri Ramblr, RPFC-II(IMe)

8. Ms Nidhi Singh, RPFC-II (IMC)

,

Shri Abhay K.Singh, FA& CAO, EPFO&Convener, Shri Cham~n Kumar,AS & FA,Ministry of, "

Labour and Vice Chairman, FIC,Dr. G. Sanjeeva ReddYiShri BN Rai):& Dr. Rani S. Tarneja, could

not attend the meeting and had sought leave ofabsence.1

Item 1:

,

The Chairman welcomed all the members and officers present in the meeting.

. .. . '.., . I

Confirmation of the Minutes of 99th Meeting of theFi~rnce and In:ve~mentCommittee held on ·28.07.2010 at EPFO HQ, New Delhlt . ~..

e'(I

(

(

The minutes were unanimously approved by all the members,

Item 2:II ••

Statement on the Actions Taken on the Recommendatipns of the FIC(

(The Committee took note of the Action Taken Report.

Item No.3. Discussion on the letter of Ministry of Finance dated ~ July, 2010 addressed toMinistry of labour regarding adoption of the Pattern pf'nvestment notified byMinistry of Finance.

(

CPFC introduced the item with the remarks that this lOQth Meeting of the FIC, CBThas been especially convened to discuss the Ministry of Finan~'s communication to theMinistry of labour for the implementation of the Pattern.of Investment 2008.

Sh. A.D. Nagpal expressed his reservations for investmen~ of EPFmoney in equity".:He also reiterated that the CBThas also in the past been opposing investments in the stock.market.

511.Sharad Patil and Sh. Santosh Saraf, were both open to the idea of equity.. \ .

investment. Both were of the view that EPFO in its constant efforts for enhancing returnson its investments should start partlcipation in equity investments at least in the AMrated PSUs to begin with.

However, Sh. Santosh Saraf expressed the urgent needjfor EPFO to upgrade itstechnical skills for handling such equity related operations.

Sh. S. K.Verma, Director (SS), MOL expressed that the e~uity investments can beI .

thought of in theinitialpublic issues of PSUs who would be divest~ng.

It was decided to place these views before the appropriate authority.

2

%.•r:r:r:

. i.

Item 4:

I

IDiscussion on Mercer's representation on'l appointment of a Consultant forSelection of FundMan~gers and their perfo...,.,arice Evaluation.

c{'

r('

r(

(

(

(

(

The matter was deliberated upon by the FlqCBT, and the decision taken by the• • I

last FIC to limit the consideration zone 'to SEBI re,istered Credit Rating Agencies wasupheld. .

Item 5: Discussion on the fetter of MIs Brickwork re,ardlng its inclusion as an approvedCredit Rating Agencyin ail cases. . ,

,

II

The FICafter discussions concluded that oncejthe Credit Rating Agenciesare SEBIregistered and regulated, they may be considered as approved Credit Rating Agencies by

• I

EPFO provided further, that their top line managers', reporting to their CEO are in .theirpermanent regular employment.

The matter was approved for recommending to the Cs:r,EPFforconsideration.I

(

(

<.

Item 6: Cleaning of Data -Inoperative Accounts.

At the outset, the Chairman gave a brief note of the item and informed the• •• i

Commtttee that after last meeting, held on 28.07.2010, a legal advice in the matter wasobtained, according to which:

a) The amount lying in inoperative accounts cannot be, closed up asthi.s wouldamount to extinguishing the property right of the account holder. The balance lyingin Inoperative Account may be transferred to Uf:lclaimed Fund so that this amountmay be availabte for safe custody and disbursement,

b} Those members who do not come forward to: collect their dues for a specifiedperiod say 36 months may not be entitled for .lnterest, In case, a member claims

• • - I

such amount later, he can be given the prlnclpa] amount as existing on the day itbecomes inoperative, with no further interestadded.

,

c)A Dormancy Charge towards maintenance of Inoperative Accounts may be levied ata reasonable rate.

I

2. The members in general agreed to the proposal ~s explained by the Chairman. The,

Chairman further elaborated that the maintenance cost: of Inoperative Account has beenworked out around Rs. 96 which may be taken at Rs. 100 per-account perannum ..

3. Shri A.D. Nagpal, while accepting the contents pf the agenda item, put up two., .

issues on which he sought for the clarifications. Fir~tly, in case of default by theestablishment, which according to him, usually happens in public sector units, the

~

3

.- i

members' accounts automaticaHy becomes inoperative after 36!:months, for no fault of theI • •

members. He wanted to know whether some provision has betn made in the applicationsoftware in use by the Organisation, to allOwcredit of interest tp such members' accountswhen contributions are received again after default is over. . .

1

4. The Chairman pointedly clarified that once a poticy decision is taken in this regard,. '. I·

there will be no problem for putting in this feature in the software tool. He further clarified., . . 1 - .

that if such genuine cases are reported, the interest of the mem,er will be protected.'1

5. Shri A.D. Nagpal,on his second point, informed that lakh~.of accounts with residual• I

balances are lying with the EPFO; Such residual balances have ~en there in the accountsdue to late declaration of interest rate and the same being cred~ted in settledaceounts ofthe members' for broken period. He suggested that efforts should be geared up to traceout such members and transfer this amount to them. He told ~hat 'once these membersget their due, lakhs of inoperative accounts will automatically ceese,

I

6.I

The Chairman info_rmed that in past there have been efforts in this direction butsince there is no-incentive for the employers to incur expenditure on thlsexerclse, it hasnot provided much result. The EPFO, however, has' been doing all sort of propagandathroughvarious means to reach such account holders.

7. Shri Sharad Patil suggested that this cleaning up exercise should also be taken up inthe exempted sector as well.

8. The Chairman stressed the need for taking a firm and bolp decision in this regard,. . ,

as the issue has been lingering since pretty long period and the Qrganisation is unable torespond to the queries of various exempted establishments that are also facing the sameproblem and look up at EPFO for guidance and solution. He further said that by non-crediting interest in high-bracket inoperative accounts, the multiJ1>leaccounts can also bechecked.

9. Shri Santosh Saraf white supporting the initiative eauttoned that properI

precautions should be taken in identifying such accounts.

10. The recommendations of FtC after deliberations were as follows:,

a) The inoperative accounts would be identified after 36 months and the interestwould cease from 3ih month on such accounts. .

b) These accounts wit! remain dormant and if any member subsequently' claims it with; I •

proper identity, the capital as existing in the inoperative account will be paid tohim.

4

---r'. ('.~r:

r-

rt:

(-

(

(-

r(

(

(

(

(

(

(

(

(

(

"

(

r-r' •rrt:

cr(

r'(

r(

(

(

(

(

c] However, in those cases, where the establishm~nt especially PSU default incontribution for more than .36 months, such accourrts would on payment of thedues be made operative with interest added there01. -

d} A dormancy charges of Rs. 100/- per account per ~nnum will be levied on suchinoperative accounts. :

,

The meeting ended with vote 0/ thanks to tht Chair.

~. •

85

(-

(-

(

(

(

(

101meetingofFIC-26.11.2010

'I

Item No.2:-Statement showing the actions taken on \the recommendations ofthe 100'" Finance 8t Investment comm~ ~eeting held on25.08.2010. .

I.,

Reference Subject Decision f! Action Taken

Item No.3 Discussion on theletter of Ministry ofFinance dated 5th

July, 2010 addressed-to Ministry of Labourregardingadoption-ofthe Pattern ofInvesbnent notifiedby Ministry ofFinance.

It was decided to 'liThematter was placedbeforeplace'the views of 'little190thmeeting of CBT.EPFFIC before the ~ on 15.09.2010. Theappropriate ~iew of CST have-also beenauthority. Fonveyed to the Ministry of

labour. If the Government~grees to the gtlarantee,~ught by the CBT, then thematter could be discussedin1lhe next CBT and an

I

"ppropriate decisiontaken.

Item No.4' Appointment ofConsultant forSeIectiQn FMs andtheir perfonnanceevaluation &

The matter was 'discussedin the 99th

meeting and it wasdecided to form afive member

A five member committeei~cluding Shri G.S.Reddy(~mployees rep. ) and ShriS~arad Patil (Employers'r~p.), has been fonned toa~pointment the Consultant.

I

First Meeting of theI

committee was held on1Q.11.2010 where in Request

I

for Proposal(RFP) has beenfirfJlized and issued to the 4

I

CRAs.I

:

DiscussionMercer'srepresentationthereon.

committee includingon one representative

each from Employeesand Employers. Inthe 100th meeting,FIC decided to limitthe considerationzone to SEBIregistered CreditRatingAgencies.

9

r. •I'I('

I

r-r(

(

(

(

(

(

(

(

(

(

(

10111U!dinHolne- 26.11.2010

Item No.5 Discussion on theletter of MIs.Brickwork regardingits indusion as anapproved CreditRating Agency in allcases.

The FIC after!discussions I.concluded that once I

the Credit Rating IAgencies are SEBI ..

iregistered and i

regulated, they may Ii

I

be .considered as :.approved Credit I

Rati A . by The matter wasplaced beforeng gencleS Ja..~ th •EPFO "- P ided ~R: 190 meetingof CBY held

. rov 6n -15.09.2010 and wasfurther, that their top ~pproved. .line managers:reporting to ~rCEO are in ~r I:

permanent regular !

employment. Thematter was approved

,

for recommendingtothe CBT,EPF forconsideration.

Item No.6Cf . f Data _ FIC approved the.eamng 0

proposalcontaining4InoperativeAccounts.

provisions includinglevy of dormancycharges of Rs. 100p.a. on inoperativeaccounts.

The matter wasplacedbeforetile CST, EPF. in its 190th

rTljeetingheld on 15.09.2010;~cluding the 4th provisioni.e.

I

reparding levy of donnancyctiarge of Rs. 100/- p.a. TheCEfT approved the rest of the

I

prpposals for which theisSue of notification by the

I

C~ntral Government is underprecess,

I

10

(

( •(

(-

(

(

(

r(

(

(

(

(

(

II

\

III

I'I

",

Review of Investments in == 9f Provident Fund,Pension Fund& EDU Fund up to 30

1

09.2010

IA. Review of Investment in respect of proYidentFTnd as on 30.09.2010

lfJl mytingofFlC 26.1l.2fJ10

Item No.3:-

INVESTMENT CORPUS- UNEXEMPTED SECTOR I, f. ,

- (All figl!.res in l.~res of Rupees)A. PROVIDENTFUNDIN~ENTS(ATFACEVAL UEl As on

I,I .-

S.N. 31.03.07 31.03.08 31.03.~9 31.03.10 30.09.10I

Central Govt.I,

40899.82 43290.121 18146.22 24004.21 32099.~4Securities I (24.30%) (23.88%},

- 25644.61 27428.502ea) State Govt. 11970.43 16429.09 19831.~9 (15.24%) (15.13%),

(b) Govt. Guaranteed 1497.32 1498.22 2830.21 2643.07 2489.80Securities , (1.57%) (1.37%)

I,

Special Deposit " 52577.51 52603.943 52232.23 52297.55 52480.9~Scheme I (31.24%) (29.02%)

Public Sector,

Financial46516.36 55455.684 Institutions(includ 19991.16 27274.63 35735.3~

ing Private Sector (27.64%) (30;59%)

Bonds/Securities),,,

Total 103837.4 121503.7 142977.~9 168281.37 181268.10I (100%) (1000/0)'I '~

I

I I

(

(' •t:

r:c:rrt:

r(

(

('

(\

C'(-

(

(.

(

(

(

- -

IfJl medingofFIC-26.11.2fJlfJ

B. Review of Invesbnent in respect of Pension FUIId a~ on 30.09.2010

INVESTMENT CORPUS- UNEXEMP' reD SECTORI I

B. PENSION FUND INVESTMENTS (AT FACEVALUE) As onI I I

("411~ rures in Crores 0' RUJJeeSJ31.03.07 -31.03.08 31.03 ~09 31.03.10 30.09.10

1 Central Govt. 17950.71 2028935 24943~59 30503.13 32109.54Securities I

(24.64%) (24.73%)

2(a) State Govt. 1189636I 15028.7 14987.6010068.05 14668r2 (12.14%) (11.54%)1

Govt. I(b) Guaranteed 1636.08 1620.95 1630·t5

2934.7 2669.70(2.370h) (2.06%)Securities -

Special Deposit II 1400.52 1400.523 140052 140052 1400.S2Scheme i (1.13%) (1.08%)

Public Sector I

Financial iI

IInstitutions(inclu I 28117.27 32854.474 ding Private 17616.01 22085.18 24722.~3 (22.72%) (25.31%)ISector I

Bonds/Securities) i1I

5 Public Account 32934.83 36,809:06 41,213.~7 45806.11 45806.11**(37.00%) (35.28%)

I

! 123790.43 129827.94Total 81,606.22 94,101.42 10857~.28 (1000/0) (1000/0)J** Provisional flQures due to the same under reconciliation i

1:.2..

(

c: •c:(~

(>

rcr-c('

r(

(

(

(

(

( .

(

101 meeting ofFIC - 26.11.2010

c: Review of Invesbnent in respect of EDU Fund as on 0.09.2010

'I

INVESTMENT CORPUS- UNEXEMPTED SECTOR

C. INSURANCE FUND INVESTMENTS (AT FACE VAL E) As on

(All ligures in Crores o'Ru/JE es)31.03.07 31.03.08 31.03 09 31.03.10 30.09.10

Central Govt.· -- I 1143.84 1187.401 Securities 477.n 597.04 846.~3 (17.00%) (13.92%)I

i 694.04 731.532(a) State Govt. 360.7 537.11 645'15 (8.50%) (8.57%)

(b) Govt. Guaranteed29.85 29.65 37.4< 109.8 109.80

Securities - (1.34%) {1.29%)

Special Deposit I

2.53 2.5 2.5 2.5\2.50

Scheme (0,03%) (0.03%)

Public Sector\Financial

1226.16 1503.604 Institutions{including 751.n 868.54 1019.~ (15.00%) (17.63%)Private SectorIBonds/Securities) I

! 4995.42 4995.42**5 Public Account 3910.95 4243.38 4604.0r (61.13%) (58.56%),

Ii 8171.76 8503.25TOTAL 5533.54 6278.22 7155.3r (1000/0) (1000/o)II

** Provisional figUres due to the same under reconciliation

13

t:c: •rc('

C

r~

('

(

(

(

(

(

(

(

(

(

(

(

(

101 meetingo(FIC-26.1J.2010

-

COrpUSunder different schemes lying investedin the securities aPR_rovedby- the Central Govt.

(Allljgures in Crores of Rupees) AT FACE VALUE As on31.03.07- 31.03.08 31.03.09 31.03.10 30.09.2010

-- -.i) Provident 103837.36 121503.7 14297739 16828137 181268.1

Fund (56.05%) (56.71%)

Ii) Pension 81606.22 94101.42 108578.28 123790.43 129827.94fund (41.23%) (40.620/0)

Employees' - -,--

Deposit 8171.76 8530.25Iii) Unked .~5533.54 6278.22 715533 (2.72%) (2.670/0)Insurance

Scheme -.

I

Total 190977.12 221883.34 258711.00 \300243.56 319626.29I (1000/0) (1000/0)II

14

(

c: .,r:(-.

(,

crC

cc( •(

f(

(

(

(

(

(

(

'"(

(

101meding o(FIC - 2tHl.2010

i,

Break-up of investments in different securities (~T FA~ VALlIE)

! I ! i(All figures in Crores of Rupees) As on

~1.03.07 31.03.08 31.03.q9 31.03.10 30.09.10I,

Central Govt. I 72,546.79 76,587.06i) Securities 36,574.72 44,890.60 57,889·06 (24.16%) (23.96%),,

State Govt. I ,

Govt I 47,054.92 48,416.99Ii) 25,562.43 32,011.38'" 39,643.2pGuaranteed I (15.67%) (15.15%)Securities ,

Special Deposit ,,

53,980.53 54,006.96,Iii) Scheme of 53,635.25 53,700.57 53,883·914

Central Govt. I (17.98%) (16.90%)

Public Sector :

Financial - - -

In stitutions(inclu 75,859.79 89,813.75iv) ding Private 38,358.94 50,228.35 61,477.5Q (25.27%) (28.1O%)SectorBonds/Securities)

,

I, SO,801.53 50,801.53**v) Public Account 36,845.78 41,052.44 45,817.24, (16.92%) (15.89%)

I

Total 1,90,977.12 2,21,883.34 258711.0~ 300243.56 3,19,626.29(100%) (100%)

"..** PrOVISIOnal figures due to the same under reconciliation

15

c'r-r(

rr(

i:

c'C

:(

C

tr(

(

(

(

(

(.

l(

(

(

(

l

101mqting o(FIC - 26.11.2010

I,

Item No.4:- Performance evaluation of the Portfolio IManagers for the periodending as on 30Hl September 2010. II -

I

- Report on Performance EvaluatiOn of EPF~),SPortfolio Managers tillSeptember 2010 has been furnished by the Consulta~t CRISIL (ANNEXURE-A)which is placed before the Committee for appraisal. :,

:

16

r ,

re -"4!

r:\'

r..rr(~

(~.

(

,(

(

(

(

(

\

(

(

\-

!l'tun No:t!.,;.. ANNEXV'R.,E ~ '/\I -

I

CRiSi,FUNDSERVICES

Performance. Evalua~ion ofEPFO's Portfolio Maoagers

IIII,,

I

,II

For the period ended 30th September 2010!

CRISIL Limited

1'1-

(c·r{'

r,CI

rt(

\

\

\

I

"-CRiSi"-FUNOSF.RVICES ~Grluation o!EPFO's Portfolio Managers

1 DEBT MARKET ROUND-UP - SEP'TEMBER 2010 ~ 3(

1:1 DEBT MARKET HIGHLIGlfTS ..•..••••....•••..••..•••..•....•..•....•.....••..l 3",

MACROECONOMIC FORECAST FOR THE FINANCIAL. YEAR 2WO -11 10(

(

C

(

1.2

2 ExECUTIVE SlIMMARY ...•.••...•.....••.•.•.....•..•...•.•....·..•..•..•••.•.f •••••••••••••••••••••••••••••••••••••••••••.•••••• 12

3 PERFORMANCE SNAPSHOT ."•..•............•......................•... .l 15

( 3.1,

FINANCIAL YEAR -INCREMENTAL lNVESlMENTS ..•...••...•..•...•',•....•••..••..•••.••...•••...•••..•...••..•...•.•15

( 3.2 "

SINCE INCEJY17.0N - CUMULATIVE PERFORMANCE ..•......••.••... + 17,

( 4 PARAMETER lViSE ANAlySIS •.......•............•........•............... + 19

4.1 RE1lIRNS ANALySlS •••...•....•.•....••••.....••.••..•......•....•.......••.....••..•• \.••..•...•.•...•...•..•••.•.. ~•...•............. 19,,

4.1.1 FINANCIAL YEAR RETURNANAL ySIS •••••..•••.•••.•••.•.••.........•...••••..••. i 19,

4.1.2 CUMULATIVEPERJOf) RETURN ANALySIS •..•.....•.•........•.••.•.•..•....•• .i. ••••••••••••••..••.••..••••.•••••••••••.•......•. 22,

4.2 AVERAGE MATURn'Y ANALySIS •••••••••••.•••.•.•....••....•••••....•••••••••• :•••.•.•••••••••••.•..••••••••••••...•.......... 25'I

,

4.3 ASSET QUALITY ANAL vsts 'r 26

5 DUSTING BENCHMARK CONSTITUENTS ..........................•.. \•....•..•..................................... 27"

6 ANNExURE :'•.......•.........•.........•.................28

6.1 AClUAL YIEl.IJS Vs BENCHMARK yIELD .•..........••....................... l..•...................................•...... 29I

Page 2 Dr ) I2010, CR1SIL All rights reserved.

18

(

rerr-r~C

r(

--CRlSi"

(

(

1.1 Debt Market Highlights

Sovereign bond prices rose in September driven by a of the increase in

(investment limits for Government securities (G-Secs~ and corporate bonds for

"foreign institutional investors' (FIls') and the decline if the Government's market

borrowings for the second half of the ongoing fin~ciaJ year. The 10 - year,

(

(

(

(

(

(

benchmark security rose as threats to its benchmark sitatus receded. The Reserve"

Bank of India (RBI) raised its key rates in the mid-quarter monetary policy review.,,

This resulted in ~ reduction in the tiquidity Adjustment Facility (LAF) corridor to

that extent. Liquidity remained constrained during the month on account of

corporate advance tax outflows that led to high inter-bank rates arid limited

purchases of gilts.

!Debt market highlights

• The RBI raised the reverse repo rate by 50 basis points to 5.0 per cent and the repo

rate by 25 basis points to 6.0 per cent in its mid-quarter monetary policy review on

September 16.

• RBI's deputy governor Subir Gokran stated that rate hifes are a better tool than,

macro-prudential norms to tackle inflation. He also stated \hat inflation would be the,

key driver of future monetary policy actions and that morietary policy over the nextI

few years would be driven more by the growth needs of the economy and less by the

urge for "normalisation" of key rates.

• The Government will borrow Rs 1.63 trillion in the second half of FYll, taking its

total borrowing in 2010-11to Rs 4.47 trillion, Rs 100 billion I, lower than the budgeted,

target of Rs 4.57 trillion. It is expected to complete its b?TTowings by the secondI

week of February, 2011.

• Ministry of Finance raised the limit for FII investments in wIts and corporate bondsi

by $Sbillion each to $10 billion and $20 billion respectively.llncrernental investments

would, however, have to be made in bonds with residual maturities of over five

years.

2010. CRISIL All righls reserved.---------------7-----~~~--.~.~-~~-.

Page 3 or ~)I

(r·rc(,

\.r·r('

(

c(

(

(

{

(

(

-CRlSi,FUNOSERVICES Performance valuation of EPFO·s Portfolio Managers

•,

The RBI will announce the Second Quarter'Review oil the Monetary Policy for 2010-

11 on November 2, 2010. !I

• The RBI purchased US Treasury securities worth $3 billion in July, taking its total,

•

holdings to $39.4 billion.

The RBI constitutes has a working group to review th~ current operating procedure,,of monetary policy in India, including Liquidity Adjustment Facility.

iRBI's deputy governor Usha Thorat said that deregulation of interest rates is on its

Iradar and that a working group is presently examinin& issues related to the savings

. Ibank rate. '

The RBI asked banks to maintain conservative limits dn their investments in zero-

coupon bonds :issued by companies. The RBI also asked banks to desist from these

investments if funds for accrued interest are not set up by the issuer.I

SEBI asked credit rating agencies to stop rating non-tapital protected structuredI

products, thereby putting an end to issuances of these instruments.\

•

•

•

Debt market indicators - a snapshot

indiCators $~pt~~~er29,2Ql{)

Call rate 6.60% 5.10% Reverse repo rate 5.00% 4.50%NSE Mibor 7.28% 5.13% Repo rate 6.00% 5.75%3-month CP 7.45%* 7.50% Bank rate 6.00% 6.00%5-yr

( corporate 8.52%* 8.53% CRR 6.00% 6.00%bond

10-yrG-Sec 7.85% 7.93% 364-day T-bill 6.70%6.54%

yield (August 25)

OIS (I year) 6.48% 6.14% WPI inflation8.51 9.78

(August 10) Ouly 10)Forex 291.59

282.84 Weighted$ (September average 5.93% 4.92%reserves (August 27) CBLOratebillion 24)

Credit 72.70% 72.64% Investment 31.28% 31.36%deposit ratio (September (August 13) Deposit Ratio of (September (August 13)24) Banks % 24)Source: RBI, NSE, CRISIL Debtbase "Data as of September 30,2010

2010. CRlSIL All rights reserved. Page 4 of 31

r(0.c:c:I.

c

--CRiSi •••.FUNOSERVlcrs Performance Eva uation 0/ EPFO' s Portfolio Managers

t:

r(

(

(

(

{

(

(

(

(

Yields ease in September after announcement of the borrOring calendar

Yields on G-Secs fell in September in comparison to the prrvious month. The 10 - year

7.80% 2020 benchmark paper's yield fell to 7.85per cent on rptember 29, a fall of 8 per

cent below its yield of 7.93 per cent on August 31. Minirtry of Finance decision to

increase FII investment limits in G-Secs and corporate bondp by $5 billion each was the,

primary market-mover. The decision led to an increase in m~ket expectation for-greater,

demand in dated securities over the coming months and th~eby contributed to the riseI

in prices. The rise was also supported by the RBI's announcFent of the Government's

market borrowing plan for the second half of FY11. The <povernment is expected toI

borrow a gross Rs 1.63 trillion in October 2010 - March 2~1. This is lower than the

+trritiafborrowing plan by Rs 100 billion. The average borrowing per week will now be RsI

100-110 billion and the borrowing is expected to be completed by the second week ofI

February 2011. .

•

(

Assurances on the continuity of the benchmark status of 7.80\per cent, 2020 bond in the\

near future with expectations of the bond's status continuing for the entire borrowing inI

FYll helped gilt prices in general and the concerned bond iinparticular. Optimism to

this effect took shape from the fact that the Government cho~e to issue 12-year paper5,

for two consecutive weeks in September 2010. This was con~ary to its usu~l pattern of,

alternating between issuing IO-year and 12-year bonds. A second consecutive fall in theII

revised figures for monthly inflation also contributed to the ri$e in prices. The prices forI

gilt securities strengthened as most banks chose to maintain firm prices to prop up their!

balance sheets ahead of the half-year end.

,

"

II

IA higher rise in rates was stymied by the sharper-than-expected monetary action by the

,

I

RBI in its mid-quarter policy review on September 16. Comments by India's ChiefI

Economic Advisor about the probability of a further ra'e hike also dampened

sentiments. A stronger-than-expected industrial growth fikure for July and theI

persistent liquidity crunch in the banking system were also faftors that led to a fall in

gilt prices. II

20 IO.CRJSIL. All rights reserved. Page 5 of 31

"<'1

r\'

f.

n("-

(

--CRiSi,FUNOSfflVICES Performance Evaluation of EPFO's Port/olio Managers

. '

Gilt yields are expected to rise in October amid fears that ~ central bank would further,I

tighten rates to anchor inflationary pressures. The expectation of rate hikes also factor in

statements by RBI officials that inflation was currently beyond its comfort zone. Market

participants are likely to continue focusing on US treasury )~elds, inflation numbers and

crude oil prices for further cues.(

(

(

(

12000

10000

r::: 8000:i:vi soooa:"-(I)

> 40000c"-:l 2000I-

0

(

(

(

Movement of 07.80% CGl 2020

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0' 0 0 0 0::::: ~ ::::: ~ ~ ~ ::::: ::::: ~ ~ ~I ~ ~-- -- -- -- -- -- -- -- a. -- -- ...... ' a. a. -- <,

o, o, o, n. o, o, o, o, n. o, o, n. o, o, n; o, o,0) cu cu cu cu Gl 0) 0) 0) Gl Gl Gl G> G> 0) CU' CD G> CD GI

~ C/)~ ~

C/) ~ ~C/) CI) C/) C/) C/) C/)

~ C/) C/),~

C/)~ ~(\J ;:::: ~ ~ to <0 ;:::: c; (\J (;) I ;::::

0 0 0 0 0 0 0 N N N C\I i, C\I C\I C\I N

_ TumoverRsMn -- WeightedAvg Semi An~alised Yield

Source: CR1S]L Debtbase

G-sec trading volumes decline in September

Trading Volumes across Tenor Buckets

>15 aSe~10, a Aug-l0

~>10&<=15~~o >6&=10CCDt-

>1& <=6

75

Turnover (Rs. 80)

50 100 125 150o 25

Source: CRfSfL Debtbase

2010. CRISIL All rights reserved Page 6 or 31

1'\r,•r,r-n(I_

eI'•..

("'1-

(1

C' \

I'

e'(

C(

(

C(

tI' •

--CRi5i'-a.FUf,IDSERVICES

\Performance Ev. 'Ination ofEPFO's Portfolio Managers

The total trading volume for G-secs declined marginally from Rs-397 billion in August to,

Rs 389 billion in September as most market participants 'i preferred to remain on thei

sidelines amid fears of monetary tightening. The decline iIn trading volumes was also• I

driven by tight liquidity in the banking system. Banks wi~essed increased borrowings

to meet outflows towards advance tax and gilt auctions. ~e system also saw a fall in. ,,

cash supply prior to the half-year accounts dosing on September 30. Trading volumes,. ,fell across tenors, except the 10 - 15 year maturity segment ~at saw a rise of around 47

.~- - . I

per cent in September over the previous month. Increased' trading in the 7.80 % 2020,,bond was led by comments by a Government official (whcj>?}about the security of its

,

benchmark status. The average trading volume for the 10 - year benchmark paper wentr

up from Rs 5.876 billion to Rs 6.082billion in August and September, respectively.II

Inflows/outflows for September 2010

Totalinflows 215.00 0.00 21.07Totaloutflows 165.00 340.00 95.52Net inflows/ (outflows) 50.00 (340.00) (74.45)Source: CRISIL Debtbase; Inflows pertain to redemptions/open market iloperations; outflows pertain to~~om !

Call rates rise on corporate advance tax outflows

Overnight inter-bank rates rose in September as cash supplt remained constrained in

the banking system. Inter-bank rates finished the month I,at 6.50-7.00 per cent on,

September 29 compared to 5.00-5.10 per cent at the end of A~gust. The systemic stress,

on liquidity was primarily due to advance corporate tax ~utflows (estimated to bei

between Rs 400 and SOO billion) and daily reserve requireme~,ts_ Furthermore, call rates

rose as banks increased borrowings to meet outflows towardsjgilt auctions amidst a fallI

in cash supply on account of the half-year accounts c10siig on September 30. An

estimation of the tightness in liquidity can be made from the Ifact that banks borrowed,

Rs 89925 billion at the RBI's repo window on September 29, ~hehighest in nearly twoI,

years.---------+------

Page 7 uf 3120 IO. CRISTL All lights reserved.

r

("" "r:t>

rrr-FI

(

r(

(

(

(

(

i_i

--CRiSi"FUNOSERVICfS Performance E\I~llation ofEPFO's Portfolio Managers

AAA Corporate Bond Spreads

Corporate bond yields rose in the short end of the curve. A~the same time, yields eased"

in the medium and longer end of the curves. The Governmeft' 5 decision to increase FIls'

limit in corporate bonds led to hopes of higher demand fot dated securities. With FIlsi

showing appetite for long term papers, securities at the shorter end of the yield curveI

saw a drop in demand. This in turn pushed up yields at the short end of the curve.,

Spreads eased across the yield curve by 5 basis points, 16 bars points and 2 basis pointsI

in the short, medium and longer end of the curve respectively. Yields on corporateI

bonds rose lesser than their sovereign counterparts in the s~rt and medium end of theI

curve. Corporate bond yields in the long tenor segmentleased higher than G-SecsI

leading to shrinkage in'spreads.

1.70% 9_50%

dorporate AAA Bond YieldsII

Corporate AAA Bond Spreads

.-~------- ..--.--.--.--.- .....- ..-- ....,-..

7.00% +---+-------------i

"!o

a ~ 0 ~ ~ 0 ~NMfll\\D:n~oooc>~~orl N M V ~ ~ q

Duration Bucket en

-.- 31-Aug-2010 --- 3O-Sep-10

ooA

'" ~ I q 0 0 0 q 0I q q

~,;,

'i' .... ..j ~ '" 00 ~ ;::ci 0 0 ~ 0

Nq ,.; 0 ~ A~ N e- onci Duration Bucket 00

__ 31-Aug-2010--.-. 3O-Sep-lO

Source: CRISIL Bond Valuation Matrix

2010. CRTSTL. A II lights reserved. Page 8 of31

rr' •I'

I

c_(

t>

I'-

\

(

(

(

(

(

(

(

.,CRiSi\..FU/I/OSERVICfS

T-Bill Review

Issue Opening DateOl/Sep/IO08/Sep/IO15/Sep/IO22/Sep/IO29/Sep/IO

Issue Opening DateOljSep/lO15/Sep/1029/Sep/10

Issue Opening Date08/Sep/IO22/Sep/l0

Allotment Date03-Sep-1009-Sep-1017-Sep-1024-Sep-lOOl-Oct-IO

Allotment Date03-Sep-lO17-Sep-1OOl-Oct-IO

Allotment Date09-Sep-lO24-Sep-1O

Issue Yield6.07%6.03%6.15%6.19%6.27%

6.44%6.57%

6,70%

I

T-Bill issuance yields rose consistently during September fOf all the 3 categories of T-

Bills (i.e. 91, 182 and 364 day T-Bills) by around 20 basis poVtts amid tight liquidity in

the banking system. Tight liquidity kept repo numbers at almost 6 times compared to

the reverse repo numbers during the month.· Amid petfistent strained liquidity

conditions, market participants continued to make use of the ~epo window to meet theirII

demand for funds. I

Rep~i~~~\~~~~t~~~~~P9·1QS(!Pt~mberRepo (Rs.bn) ReverseRepo(Rs.bn)6049.05 1033.5

20 Io. CRISIL. All rights reserved.---------+------ --~~----------

Page 9 or 31

(

r: "rC('

('

(' -

(

r(..

-CRlSI\.FUNOSERVICeS

1.2 Macroeconomic Forecast forthe financial year 2010 - 11

Growth Agriculture 5.5

Industry 8.6Services 8.8Total 8.2

•

(Inflation B-0-85WPI-A verage

Interest rate 1O-year G-Sec (Year-end)

B-1-83

Exchange rate Re / US $ (Year-end)

435-44.0

dian Economy for

GDP forecast for FYll is revised upwarcto 8.2 per cent from 8.0 per cent due I

. higher-than expected governmerI spending this fiscal which would push u':services sector growth, reflected i:1 growth of personal and communitiservices. Our expectations on agriculturland industry growth, remains unehangec\Farm output boosted by a low base and'Igoodmonsoon is expected to grow higheIthan its trend, while industry is expectecI

~o do well buoyed by the pick-up iJ..-private and investment d-emand.

l-<\ verage inflation forecast for FYll ha:I .peen revised downwards by 50 bps OJ

account of difference in trends of themajor inflation categories, especially ir~he manufacturing products, with the~ew base of 2004-05 relative to the olebase of 1993-94. Moreover, inflation i:~xpected to come down further on the9ack of improved farm output and RBI':tightening measures to tame non-fooci~fla tion. -A marginal lower government borrowing~ogramme for FYll than earlierahnounced, raising of cap on FI]

I

pr"ticipation in the G-sec market andldwer inflation projections would heirb~ng down pressure on yields in thes4cond-half of this fiscal. Under thisb1ckdrop, we have re.vised our year-endforecast for yield on the 10-yr G-se(downwards to 8.1-8.3 per cent from 83-B-~ per centFqreign investments are expected toremain robust in FYll, thereby increasingth~ supply of US$ relative to the demand_llis coupled 'with rising interest rateditkerential should enable the currency toco*tinue on its fundamental trend ofaprreciation.

I,

I

Page 10 of 312010. CRTSTL. All rights reserved.

(

( er(

(

(

(

,

-CRi51,FUNOSERVICfS

i_f$,~¥Jl~~~j.~~jiIL.'i~~;.,Fiscal deficit As a % of GDP 5.0(Ind off-budgetliabilities)

The partial roll-back of fiscal stimulus aru,'I a sustained economic recovery is expectec,to significantly improve the govemmen:tax revenue during FYll. This along witlithe revenue garnered from the spectrun

and lower subsidy bill owing hdecontrol of petrol prices wouIethe fiscal deficit down. However

:the additional government spending~nnounced recently would exert oppositepressure.,'i,

. ,!

(

Page II of 312010. CRISTL All rights reserved.

r( •rrt:

(

(,

(

(

(

(

(

(

(

(

-CRlSl••...FUNOSERVICrS

(a) Performance evaluation - Financial Year

The analysis factors:

• Portfolio yields for the period 1st April '10 to 30th SP,'\tplrT'1

• Asset quality and average maturity for portfolios

'10

Summary of ranks

'I

HSBC 99.77 1 IICIOPRU 98.61 2 I

II Reliance 98.36 3 I\

SBI 96.44 4 IIIII1

iParameter wise performance

•

Scaled!Debt.:,:'-_·--:-'-:.',::-i"C:-'-:'

Asset i .Q~~~ty\ R~nk

0.93 iI

0.84 "I

0.68 \

The overall ranks for all four fund managers have\ remained

\

1\y;gMahujtyRank

Fin~l FinalSc6f'e Rank

HSBC 0.9971 2

ICICI PRU 0.9924 4Reliance 1.0000 ]

SBJ 0.9966 3

SeAvg

Maturity1.0000

0.9971

0.9990

1

3 2

99.77 1

98.61 2

98.36 3

96.44 4

2 34 4

constant with

respect to the analysis in June '10.

• Asset quality witnessed a higher dispersion in scores ompared to the previous

quarter. The analysis in June '10 had seen an improve ent in asset quality for all

fund managers.

20 J O. CRISTL All rights reserved. Page 12 or31

t:

"CRiSt •••.FUNOSERVICES

rr:

(b) Performance evaluation - Cumulative period since ~n"'Pn,h

The analysis factors:

• Portfolio yields for the period 17th September'08 to

• Asset quality and average maturity for portfolios

(

(

r(

Summary of ranks

( HSBC 99.26 1ICIOPRU 99.22 2Reliance 96.84 3

( SBT 95.49 4

Parameter wise performance

30th September 10.

Av:gMatUrityRank'"

HSBC 0.9908 2 1.000 1 1.00rcrci Pru 1.0000 1 0.997 3 0.93Reliance 0.9810 '4 0.999 2 0.84

SBJ 0.9848 3 0.995 4 0.68

12

99.2699.2296.8495.49

1234

34

• HSBC has improved its position on the overall rankings the first position. It was

ranked second in June '10.

-------t------------------ ..-2010, CRISIL All rights reserved. Page 13 of 31

(

I- e('

I'

c(

r(

(

(

(

('

(

(

-CRiSl"FUNOSERVICES Performance Ell illation ojEPFO's Portfolio Managers

(c) Cash Flow - Yield Analysis _

The analysis seeks to capture yields earned by the fund manager for the cash flows

received by them during the period.

.....- --.--..- ------ - -- ..-..-..-..•..-.-."--"'1

IC,CIPRU !9..0~ ,I.'

8,S,"

8-0*

$81

9_0"8000

6~

5000

3500 II

2000 II

500 IIDec-09

I 8..0%

1 ..7..5% 1150..••~

lULU oJU50

Jun-tO Sep-10 5ep·10

HSBC9.0% ;e 9.~

3250 ~S5'%r 8,5:lG1750

80% n;o Sh~7.5% 1150 75%1.C~ 1250 7.0"",6.5% 150 5.SS;;

5.0" 250 5.0%

5.:p-10 S,ep-H)

• ICICI Pro earned a high yield when it got its highest c h inflow in July 2010.

• The yields earned by HSBC were significantly lower t an other periods when it

received the maximum cash inflow (March 2010).

2010. CRTSJL All lights reserved. Page 14 of31

30

7..5;£

6.5%

.1

I,

rIr:

rrt:

(

('

r.

(

(

-CRiSi\..3.1 Financial Year -Incremental Investments

Period considered: Is1 April 10 to 30th September 10.

Composite performance summary

(

( ICICI Pro 1.0000 0.997 3( Reliance 0.9810 4 -.0.999 2

5m 0.9848 3 0.995 4

fCICI PruH5BC

Reliance5BI

SeatedS~ore On

Avg.Maturity].00001.00001.0000].0000

0.931.000.840.6]

2010. CRISTL. /\11 lights reserved.

111

1

1.00000.99080.97810.9831

]

243

34

99.2296.8495.49

234

2134

99.3199.2696.6594.70

1234

Page 15 of31

-CRl5I"-.FUNOSERVICfS

8.35%

%) for the period endedThe graph below gives a snapshot of returns for FY 10-11

September 201 ()1.

Financial Year 30th Apr - 30 Sep(Incremental Investment)

(

(

C(

C(

8.65%

8.55%

8.45%

8.25%

H5BC ICICI Pru RELIANCE 5BI

( - . Non CFWtd. 8enl:hm~trk

(

(

Fund Mana ger Yield % of PortfolioIClCI Pru 8.558 74.532 {CrCT PruSBJ 8.615 81.252 HSBCHSBC 8.590 79.596 RelianceReliance 8.626 74.742 SBJ

• Reliance AMC has obtained the highest yield

September 2010. This is primarily on account of the

from its investments in discount securities.

25.46820.404

8.684 25.2588.594 18.748

the period ended 30th

yields obtained by it

The table below gives the returns for the last analysis period i.e. from 1st April 2010 till

30th June 2010 for your ready reference.

Fund ManagerICICIPruSBIHSBCReliance

Yield8.4158.5738.4998.612

I NOli CF Wld - Non cash now weighted

2010. CRISTL All rights reserved Page 16 or 31

(

I(-

r('

c\'

c·crC(

(

c(

(

(

"CRi5l,-FUNOSERVICfS

(

3.2 Since inception - cumulative performan

Period considered: 17th September 2008 to 30th September

ICICI Pru 1.0000Reliance ·-O,98l{}-

S8I 0.9848

143

0.9970.9990.995

24

34

99.22%:8495.49 4

ICICI Pru 1.0000 1 1.0000 1 0.93HSBC 0.9908 2 1.0000 1 1.00

Reliance 0.9781 4 1.0000 1 0.84SBI 0.983] 3 1.0000 0.61

2134

99.3199.2696.6594.70

34

12

The graph below gives a snapshot of cumulative returns for period ended September

Yield for 17th Sept 08 - 30th Sep 10 (Cu ative)

2010

8.75% .8.72%

8.55%

8.65%

8.45%

8.35%

8.25%

Page 17 of 3 J

HSBC ICiCI Pru RELIANCE S81

Non CFWtd. Benchmark

20 J O.CRISIL. All rights reserved.

33

(r' -CRiSi\..FUNOSEflVICf.S

The graph above displays the yield in percent from

by each portfolio manager vis-a-vis .the non-cash

difference in the yield obtained under the portfolio of UI"',~~"'!""

the yield obtained under that of premium securities.

(~(

(

C(

(

(

(

(

Fund Manager Yield % of PortfoliolCICI Pru 9.185 55JJOOSBJ 9.046 54.545HSBC 8.963 63.955 Reliance

Reliance 8.914 58.079 SBI

2008 to September 2010

8.0478.028

36.04541.92145.455

(The tabJe below gives the returns for the last analysis oerioet from 17th September 2008

till 30th June 2010 for your ready reference.

Fund Manager YieldICIO Pru 8.723SBJ 8.576HSBC 8.643Reliance 8.533

l

201 O~CRiSIL. 1\11 rights reserved. Page IX of31

( ,r-rrr>

(

c·t:

(

(

(

(

cc(

(

"CRiSi •••.FUNOSERVIC£S

4.1 Returns analysis

4.1.1 Financial Year Return Analysis

Cumulative benchmark and portfolio yields for the np'riod 1st April 2010 to 30thSeptember 2010

Yields in percent

HTM Yield Benchmark 8.41 8.41

8.64 8.61

8.41 8.41

Composite Portfolio Yield # 8.62 8.57# Composite portfolio yield for each fund manager is calculated by weifl"infl the yields obtained from theportfolios of discount and premium securities using weighted book For fund managers managingmore than one fund (viz., TGG Pru AMC and HSBC AMC), the portfolio yield is based on theweighted average book value for all funds managed by them.

Rankings - composite portfolio yields

a) For the period from April 2010- September 2010

( AdjustedClitTent Yield approach fot Premium Secudttes.an(f Yl:ldaJl'pr<oa. ... securities ...

for

Portfolio HTM Relative Average Score on YieldReturnsHTMManager Yield (%) (%)

Yield Rank

, Reliance 8.640 8.73 8.67 1.0000 1HSBC 8.615 8.71 8.64 0.9971 2SBT 8.611 8.70 8.64 0.9966 3

JOO Pru 8.575 8.67 8.60 0.9924 4

.-------------------------f----------.-- -.----.--2010. CRISTL All rights reserved. Page 19 or31

35

rrc:t:

rrtC(

(

(

(

(

(

(

"CRiSI\...FIJNOSERVICf.S

b) For the period from April 2010 - June 2010

'Portfolio HfMRelative

Average Score on Scaled Score on YieldReturnsHTMManager Yield (%) (%) Yield Yield RankReliance 8.612 8.70 8.64 1.0000 1

5BI 8.573 8.66 8.60 0.9954 2HSBC 8.499 8.58 8.52 • 0.9869 3

ICTCIPRU 8.415 8.50 8.44 0.9772 4

In the above analysis, 70% weight is given to H1M yield a d 30% to returns relative to

the benchmark.

2010, CRISTL All rights reserved----~--------------------___t_

Page 20 of 31

r("

cC'

rrr(

(

(

(

(

(

C(

(

(

-CRlSi,FUI.OSERVICES Performance Eva uation of EPFO's Portfolio Managers

HSBC

(

r~

Contribution Analysis - Financial Year:

The analysis shows the asset wise yield breakup for all portfolio managers for the

Financial Year period from 3()th April 2010 to 30th September 0102.

Reliance

-'l"eo..-ICICIPRU( SBt

(

'.

.a e,5"'1a s &6~----S.M~

•,

Reliance has earned a higher yield on private bonds a1d Government securit~es

over all fund managers. This has resulted in it bein1 ranked number one on

yields. \

II

~- -----------------: Page 21 of] IiI

Z CGS - Central Govt Securities. BB - Bank Balance- .

20 J O. CRTSJL All rights reserved.

Performance Evatuation 0/ EPFO 's Portfolio Managers

(

C "rc:cc(:

rr-C(

(

cr(r,(

titCRlSi~FUNDSERVICES

4.1.2 Cumulative Period Return Analysis

Cumulative benchmark and portfolio yields for the •..•·••·•.•n' •.•September 2010

September 2008 to 30th

Yields in percent

8.54HTM Yield Benchmark 8.54 8.54 8.54

Yield as per revised Methodology# 8.64 8.72 8.55 8.58# Composite portfolio yield for each fund manager is calculated weighing the yields obtainedfrom the portfolios of discount and premium securities using toetontea book value. For fund

-.Jnanagers managing more than one fund (viz., IClCI Pru AMC HSBC!\,MC), the compositeportfolio yield is based on the weighted average book value for all managed by them.

• The cash-tlow adjusted benchmarks for HSBC, ICICI

non cash flow adjusted benchmark. TIle

the fund manager receiving a large quantum of

yields.

and 5BI are close to the

adjusted benchmark for

at the time of low market

Rankings - cumulative yields

a) For the period from 17th September 2008 - 30th September

Portfolio HTMRelative

Average Score onRetumsHTM

Manager Yield (%) (%) Yield

ICICI Pro 8.716 8.68 8.70HSBC 8.636 8.59 8.625BI 8.583 8.54 8.57

Reliance 8.550 8.51 8.54

YieldRank

1.00000.99080.98480.9810

1234

2010. CRISIL All rights reserved. Page 22 of31

38

(

c: .,r(-

r~(~

(- .

r('

Cr(

(

(

(

(

(

"CRiSI~FUNOSERVICfS

b) For the period from 1']th September 2008 - 3()th June

Portfolio HTM RelativeAverage Score on Scaled Score on YieldReturnsHTM

Manager Yield(%) (%) Yield Yield Rank

JClG Pro 8.723 8.66 8.70 1.0000 1HSBC 8.643 8.58 8.62 0.9908 2

Reliance 8.533 8.46 8.51 0.9781 4SBI 8.576 8.51 8.56 0.9831 3

• It is noteworthy that alJfund managers have

interest).

• The relative returns vis-a-vis the benchmark have considered assuming a

declared rate of return of 8.5% to EPFO's subsc .•.•h"'.••., and adjusting it with the

8.5% (EPFO rate of

2010. CRISIL. All rights reserved. Page 2:1 or 3 I

(

( •rc(,

I

cI

I

I

(

(

(

(It(

(

(

(

l

l

l

-CRi5i~FUNOSERVICES

12.0%

Performance Eva uation ofEPFO's Portfolio Managers

Contribution analysis - cumulative period:

The analysis shows the asset wise yield breakup for all portfolio managers for the

Financial Year period from 17th September 2008 to 3()th Septe ber 201()3

ICICIPRU Hsac

•12,0% 6OJ)%

10,~&0.11%10.0%

8,0%Mi.O%

30tO%6.0%

2').0%4.O%c.. __

10.0%3~

2.0%

S8.

10.0%

120%

\4.0%

4..0%

10.\1%

• ICICI PRU's dominant position on yields can be attributed to the high yieldsI

earned by the fund manager on PSU and Pvt Bonds.

3 BB - Bank Deposit. CGS - Central Government Securities, FD - Fixed De sits2010. CRTsrL All lights reserved. Page 24 or 31

'-10

Performance Ev uation o!EPFO's Portfolio Managers

(

r8r:c:t:

c(

-CRiSIs..FUNOSERVICES

4.2 Average Maturity Analysis

All fund _managers have aligned their portfolios to EPF s requirement, having the

maximum concentration in the 5 - 20 year bucket. All ortfolios have an average

maturity higher than 5 years. ~o fund manager attrac d any penalty for excess

exposure to instruments with maturities less than 1 year.

(

('

c:r(

(

(

(

(

(

IFor calculating the excess exposure in securities with++greater than 20 years, all

purchases in G-Secs with a residual maturity greater than 2\ years' yielding higher than

8.50% have been excluded. I

Parameter weights

(Maturity less than 1 yearMaturity greater than 20 yearsPortfolio Average Maturity greater than 5 Years

Ranking on average maturity

;score

HSBC 1.00 1.00 1.00 1.000RELIANCE 1.00 1.00 1.00 0.999ICICI PRU 1.00 0.99 1.00 0.997

SBI 1.00 0.98 1.00 0.9951.00

50.0%25.0%25.0%

1234

• ICICI Pru and SBI have attracted penalties for excess e sures in instruments

with maturities greater than 20 years.

2010. CRISIL. All rights reserved.

41

\t ---III

I

Page 25 of31

(-

c (I ,

c:c:c:('

r·rcr:r

"CRi5l••..FUNOSERVICES Performance Eva lion ofEPFO's Portfolio Managers

4.3 Asset Quality Analysis

HSBC 3.99 1.00 1ICIOPru 4.31 0.93 2Reliance 4:.77 0.84 3

SBI 5.90 0.68 4

rc(

(

(

Rating Wise Allocation

(

IDen -J"t!( i-

Ii!ICICI PRU

• Soverign • AAA ill AA+HSBC 581

I

I

I

On the Asset Quality parameter, HSBC continues to be in the $rst position on account of. I

higher allocation towards sovereign and higher quality instruments. HSBC is followedII

by ICICI Pru and Reliance who are at second and third positidns respectively. These are

primarily on account of some exposures to lower rated (AJA+and below based onI

CRISIL's credit view) instruments. SBI continues to be ranked last on account of itsI

exposure to lower rated (AA+ and below based on CRISIL's cr~dit view) instruments.

II

2010. CRTSJL All rights reserved. Page 26 of 31

fitCRlSi•••.

~..,

The Benchmark HTM yields have been formulated

for various asset classes.

the following constitution

SOLs

GILTS

Corporate Bonds

Corporate Bonds

•.Here the interest rate has been considered to be an average for SBI, PNB BoB for 6 months.

$ For Corporate Bonds (Private), the spread coer AAA PSU Bonds would 50bps till 30/09/2009 and 25

bps [hereafter

2010. CRIS1L. All rights reserved Page 27 of) I

43

c·c: ",r: --r:

CRiSt"-(' FUNOSERVIr.ES

(

c:rCCc:~C(

r/'\

C(

(

(

(

l

Performance Eva "arion of EPFO 's Portfolio Managers

2010. CRISTL All rights reserved. Page 28 of 31

( • .»

t:

r~r"(

r'(.

(~

rc(

c

r

(

-CRiSilFUNOSERVICfS Performance Evaluation ofEPFO's Portfolio Managers

6.1 Actual Yields Vs Benchmark Yi

1 February 10·28 February 10(post amortization effect)

1 March· 31 March 10 8.42% 7.42%(New Methodology for Evaluation)

1 April· 30 April 107.32% 7.94%(New Methodology for Evaluation)

1 May· 31 May 10 8.61% 7.44%(New Methodology for Evaluation)

1 June· 30 June 10 8.62% 8.15%(New Methodology for Evaluation)

1 July· 31 July 10 8.60% 8.13%(New Methodology for Evaluation)

1 Aug· 31 Aug 10 8.45% 8.39%(New Methodology for Evaluation)

8.52% 8.41%

2010. CRISIL AlilighlS reserved.

(

(- tt(

('

rI

t.

rcr(

(

(

c(

(

(

(

-CRl5i••••FUND SERVICES

_.,

1st April 10 - 30 April 10(New Methodology for Evaluation)

1st April 10-31 May 10 8.29% 8.23%(New Methodology for Evaluation)

151April 10 - 30 June 10 8.50% 8.42"10(Ne,w Methodology for Evaluation)

1st April 10 -31 July 10 8.57% 8.50%(New Methodology for Evaluation)

1st April 10 -31 Aug to8.60% 8.55%(New Methodology for Evaluation)

1st April to - 30 Sep 10 8.62% 8.57%(New Methodology for Evaluation)

(

1st April 10 - 30 April 10(New Methodology for Evaluation)

1st April 10 - 31 May 10 8.68% 8.68%(New Methodology for Evaluation)

1st April 10 - 30 June 10 8.58% 8.67%(New Methodology for Evaluation)

1st April 10 - 31 July 10 8.58% 8.67%(New Methodology for Evaluation)

t st April 10 - 31 Aug 10 8.59% 8.67%(New Methodology for Evaluation)

1s1April 10 - 30 Sep 10 8.59% 8.67%(New Methodology for Evaluation)

2010. CRlSIL All rights reserved.I--,~-~-.-~~-------- -----. Page 30 of 3 I

(-

c: •rC(.

c:r('

(

r(

(

(

c(

(

(

(

Item No.5:- Shifting investment from IIFCL Bonds

101 meetingofFIC-26.11.2010

-The invesbnent strategy of CBT EPF Funds is go rned by the Invesbnent

Pattern prescribed by the Government of India (Ministry of labour). The presentPattern provides for investments to be held till maturity and exit option of any kind isavailable, except in case of rated instruments where th lr rating falls below theinvestment grade. So presently no sale of any investment is allowed as per the extantpattern.

2. However, we have a unique case here of investment in x free bonds, which willgive usa premium on sale and a higher yield on re-inv ent of the sale proceeds.The details about this investment instrument are as Underli. The Bonds were issued by - India Infrastructure Fina e Company ltd (llFCL),

which was established 'in January 2006 as a wholly ow Government companyfor financing viable Infrastructure Projects through thi Special PurposeVehicle.

ii. The Bonds were fully guaranteed by the Government 0 India.iii. Owing to Govt guarantee this invesbnent was ca orised as 'SfG/ SOL'

investment for the purpose of prescribed investment Pa em.iv. The bonds were purchased in the Primary market in J nuary / February 2009 at

Face Value, at the rate of 6.85% interest / YTM per yea .v. The bonds were purchased by CBT-EPFFMsat a ti e when the comparative

yields in 'G-Secs' were trading at about 80-90 bps 10 rand 10 year SOls wereavailable at 20-25 bps lower than this rate of 6.85%.

I

vi. The bonds were issued as tax free bonds, though this vtas not material for EPFOsince anyways all interest incomes of CBT EPFare exempt from Income Tax.

vii. The total investment of CBT EPF Funds in such Bon~ was Rs 950 Crores bydifferent FMs. . I

3. Now there are two points in this case - (1) the market ~te of these bonds hasincreased to Rs 102.20/30 and (2) the rate of interest on S Ls has reached the levelof 8.50/55% (annualised). The implications of these devel pments for EPFOare asunder:i. The market rate being higher than the Face Value (or th Purchase Price) implies

that there would be Capital Gain on the sale of these nds in the market. Thereason for higher market price is that owing to being free, these bonds wouldgive a pre-tax return of around 9-9.05% rerum to oth investors, so they areinterested to pay higher price for it. ~'

ii. The sale proceeds would be invested at a higher rate f investment at around8.50/55% annualised return. So there would be higher interest income eachyear (at about 1.65% extra rate).

IIII

4"1-- i

10111W1ing o(FIC - 26.11.2010

iii. The financial benefit would be to the tune of Rs 21 C as Capital Gain on thesale of total holdings of Rs950 Cores in UFCLBonds interest income would beenhanced by Rs 16 Cores in each of the four years till the maturity of IIFCLBonds. So the total financial implication for EPFO ould be Rs 85 Crores(approx.). I

4. It would be prudent therefore to sell these bonds at a p mium, and then re-investthem at a higher yield, since suChan opportunity has ari n. This may be treated asa onetime measure. lhe category-wise invesbnent pattern will be maintained .

•

The matter is placed before the FIC consideration andrecommendation 0' the proposal at Para 4 ore to the CST rorrecommending the matter to the Central Gore ment mr aHowing theproposedsale transaction,which is otherwise,no permissibleasper theextant pattem.

48

rI'

~rCrC'

(

c:c,

f'(

(

(

C(

(

(

(

101 meeting ofFIC - 26.11.2010

Item No.6:-Revised Estimates for the year 2010-11 a d Budget Estimates for. the year 2011-12 for the Employees' rovident Fund Scheme

1952, Employees' Pension Scheme 1995 nd Employees' DepositLinked Insurance Scheme 1976.

I

In terms of the proviSionscontained in paragraph 58 t the Employees' ProvidentFund Scheme 1952, the Budget proposals (Revised Esti tes 2010-11 and BudgetEstimates 2011-12) in respect of Employees' Provident Fu Scheme 1952 (includingthe Employees Pension Scheme, 1995) and Employees' Deposit Unked InsuranceScheme, 1976 have been tabulated and the position is ind cated in the Budget Book.

The statements showing the receipts on account of nmbution, AdministrativeCharges, Inspection Charges, Penal Damages, Miscellaneo Inrome and Recovery ofAdvances and the proposals for expenditure made in the ~ev sed Estimates for the year2010-11 and Budget Estimates for the year 2011-12 are indi teetin the Budget Book.

Accordingly, the Revised Estimates for the year 10-11 and the BudgetEstimates for the year 2011-12 for the three Schemes fra under the EPF& MPActare placed for consideration before Finance and Investme t Committee, Employees'Provident Fund and to recommend to the CST, EFPfor appro I.

(~

(\~

c:r~("'>

t>

"-.~I\'t>

r(

(

(

c(

(

(

(

101meetingofFIC-26.11.2010

Item No.7:Relaxation in Invesbnent Guidelines for Investment inBonds/Securities of. PSUs/PSBs/PSFIs- EXPANSION OF UMITSTONETWORTH

The CBT in its 189th meeting had approved the ern nge in existing investmentguidelines for increasing the exposure for Public Finanrial Iilstitution (PSfI/PSB)Invesbnents by adoption of IRDA expOSUrenoons of 100/0 of the capital employed or60% of net worth eX the company in addition to existing limits for dual MA ratedissuers. While for dual AM rated PSUs as well as Iess than dual AM ratedPSUS/PSBs/PSFIsOmitswere retained at 40% for PSUsand 45% for PSBs..

In past also it was proposed to FIC in its 94th meetin~ to raise the limits to 50%of net worth uniformly for PSU/PSFl/PSBsheld on 26/03/200~ but it was decided to notto increase the limits in one instance and initially increase tm! limits by 15% to 40% forPSUs& 45% for PSBsand were increased by 15% by the Csr in its 187th meeting heldon 04.07.2009.

However the limits in respect of fOllowing]Ssuers in wi ich EPFOinvests regular1yare already exhausted or are about to be exhausted as on 31 10.2010.

~ISSUER PSB/PSFI/PSU RATING Eiigib~ Limit Limit Utilized

Power Grid PSU DualMA 4)% 39.08%Corporation(PGC)Power Finance PSFI DualMA 61~IO 56.30%CorporationCorporation Bank PSB DualMA 6(flO 48.30%IDBI BANK PSB DualAA 1!% 45.00%

llle above mentioned entities are regular Issuers of tI~e Bonds and EPFObankupon them for deployment of its funds. Thus, there is a fit case to once again reviewour existing guidelines on limit on net worth for dual AAA rate j PSLJsand less than dualMA rated PSUs/PSBS/PSFIs,so that we can rationalize fhem and release someadditional limits so that EPFOcan continue to invest in issuanc~sof frequent Issuers likeones mentioned above.

Accordingly in this regards following proposals are placej for consideration:-

PRESENT PROVISIONS SUGGESTEDCHANGES

EFFECT 0 t: CHANGES

I. Para 5.2.4 ofInvestmentManagement Manualfor Portfolio Managersprovides that the

A. It isproposedthat theselimits maybe further

1) InCrE ffiing the criteriafor extending the Limitsfor i~vestment in theseestat Iishments willrelease further limits for

.50

{

(' •(

(-

cr-(

(

(-

c(

(

(

(

(

101 meetingo(FIC -26.11.2010

-

maximum limit forinvestment in aparticular PSFls andPSBs have beendefined. Originally itwas 25% of the NETWORTH of theestablishment whichwas exhausted andfurther extended asper IRDA norms-up to60% ot NET WORTH. or 10% of theCAPITALEMPLOYED,

whichever is lower -fordual MA ratedPSBs/PSFIs and forless than dual AAAratedPSUS/PSFIs/PSBslimits are 45% forPSBs & 40% forPSUs/PSFIs

rationalized asunder:-

a) For DUALAM ratedPSUs 60%of NetWorth

b) FORM +&MratedPSUS//PSBS/PSFI~

500/0 ofNet Worth

del~loyment of EPFfun ds _in these highlysafi~ corporations inwhch EPFOsinv4~tment limits are

- alrE~dy exhausted oraboot to be exhausted.

2) Sim larly increase in theCrit4~ for extendingthe limits forinvE~tment in PSBs will _also open additionalwindows for safelnvestment.

Theproposal as outlined at Para A (a) & Para A (b) a/J( ve in SUGGESTEDCHANGESis submitted for consideration and recommet. dation to the CST.

51

•Item 8: Relaxation in Investment Guidelines to in

the basket of instruments in Pvt. Sector

191 mgJingo{FIC-26.11.2010

se limit and expand

An item to relax Invesbnent Guidelines for Investmen in private sector Bondswas placedin 98th meeting of FICheld on 28.02.2010where i was proposedto expandthe investment basket in private sector by including the it worthy private sectorcompanies also. However FIC recommended to CBT to i lude only such privatecompanieswherea minimum 26% of the sharesare held ind·idually or jointly , by anyPSU(s)/centralGovernment or State Government and the company has dual AMratings for its Bondsand samewasapproved in 18gthCBT.

Only two entities i.e. UC HousingFinance& Infrastru ure Leasingand FinanceCompany Ltd (ILF&s Ltd) got included in the private sector investment basket as aresult of the relaxationand sincetheir net worth was small the exposurelimits availablegot utilized immediately.

From the existing Investment basket also gut of to I seven eligible entities,limits are nearly saturated in case of HDFCLtd.(25%), ILF Ltd(20.36%) & IDFCLtd(25%) .

Thus there is a strong case for having a fresh cons' eration of revisiting theexisting guidelines for investment in private sector by way of both expanding theinvestment basketas well as expandingthe existing limit of n t worth in this category.An opinion from our consultantCRISLon the issueof expansio of ihvestmentbasket inthe private categoryhasalsobeenobtained and enclosedasA nexure-A.

In this regardsfollowing proposalsare placedfor coast ration:-

PRESENT PROVISIONS SUGGESTED CHANGES

A. It is proposed that the If the proposal isexisting basket of co siderecf it willeligible entities in 0 n new avenuesprivate sector may be for investmentin safeincreased to include pri ate sectorentitiessome more Private (lis enclosed asCompanies to enable An exure-B),expanded res Iting in increasedopportunities to invest ba aining power ofand get higher yields EP0 for maximizingwith sufficient security yie s.of the Bonds. Wecould have followingcriteria:

a Havin NetWorthof

I. As per theInvestment Pattern2003 (copyenclosed) it isprovided as followsin para (v) \\ TheTrust subject totheir assessmentofthe risk-returnprospects, mayinvest up to 1/3rdof (iv)* above , inprivate sectorbonds/securities,which have an

OF

r:,

r-' e!

t'r>,

I'

Ir>

r=: II.r

r-

r-

101meeting ofFIC - 26.Il.201 0

invesbnent graderating from at leasttwo credit ratingagencies"

Within -thisinvestment pattern2003 , the CBT hadapprovedinvestment asfollows:

a) Pvt Bank Bondswith dual AMratings upto 25% ofnetworth andmaximum 15 yearstenure whichpresently includesAxis Bank,HDFCBank & IaCIBank.

b) HDFC Ltd & IDFCLtd are two otherPvt. Sectorcorporate entitiespresently approvedby CBT.

e) All joint sectorentities havingminimum 26%shares held by thePSUS/CentralGovernment/StateGovernment (jointlyor singly) andhaving dual AMrating are eligiblefor investment. Sofar UC HousingLtd & ILFS Ltdonly are two eligibleentities.

Rs. 1000 Crores ormore,

b) Dual AM rating bySEBI approved ratingAgencies

c) Having continuousprofitability and-,declaring dividendover last 10 years

d) Must be a listedcompany on anyIndian stockexchange.

e) 1he maximum tenureof investment in suchBonds will not beexceeding 10 yea~ _

f) -.~ minimum spread ofat least 100 bps ormore overcorresponding tenureof PSU Bond need tobe captured.

B. Further the maximumlimit for investment of25% of net worth mayalso be considered tobe raised to 40% ofnet worth since theselimits _are alreadyexhausted or about tobe exhausted infollowing eligibleentities :

a) HDFC Ltdb) IDFC Ltdc) ILFS Ltd

Theproposal as outlined at Para A & Para S above in ~UGGESTEDCHANGESis submitted for consideration and recommelldation to the CST

('

Ct: @

c:ct:(

(

cc(

c(

(

(

c(

INVESTMENT IN PRIVATE SECTOR AM APER

Plain Vanilla bonds

No CRISIL:rated AAA bond has defaulted in the last 23 years

None of the AAA rated papers has moved below the AA category in23 years; in fact most AAA rated entities have maintained their ratin

Additional r uirements that EPFO could sti ulate for investment in ain vanilla AAAs• The instrument should be rated by at least two agencies that ha e published

default histories for at least 10 years'• The issuer must have a track record of five years of profitable d dividend-

paying operation

Guaranteed/structured bonds

Examples of guarantors include banks (SBI) and institutions (IIFCL, P C). Structuredinstruments would have AAA cash flows (e.g. NHAI). CRISIL assigns these ratings asuffix of (so) to indicate the structure. The credit quality is equivalent t any other AAA.

No CRISIL-rated private-sector AAA(so) bond has defaulted in the las 23 years. Theonly default was in two public sector entities wherein the guarantee w by Gol; allpayments on these bonds were made subsequently.

Additional requirements that EPFO could stipulate for investment inguaranteed/structured AAAs

• The instrument should be rated by at least two agencies that hay publisheddefault histories for at least 10 years /

• EPFO may consider investing only in instruments that have b n assigned a finalrating i.e. where all documentation is complete including signed guaranteedocument. Some rating agencies assign provisional/interim rati gs to instruments;we suggest that such paper not be considered for investment.

• The guarantee should be unconditional, irrevocable, legally alid, bankruptcy-remote, and enforceable for both interest and principal, over t e entire tenure ofthe instrument.

• The structure should have identified timelines for the guarantee to be invoked, sothat investors are paid in a timely manner.

As the instruments here are backed by some structure, track record and ividend paymentwill not be essential requirements and will not be relevant

OUR DETAILED NOTE IS ATTACHED

DETAILED NOTE

ments issued byrestrictive. EPFO

ents issued byme points on theliesector,

rr-,

r,

Investments in private sector entity debt instruments)

While the current EPFO guidelines allow for investment in debt inprivate sector entities, the internal practices followed for investment aris planning to review this, and look at increased investment in debt insprivate sector entities. In this context, CRISIL would like to highlightperformance ofCRISIL AAA-rated entities in the private sector and pu

No CRISIL-rated AAA instruments issued by private sector entitir have defaultedin the last 23 years

A credit rating represents the rating agency's opinion on the likelihJd of the companybeing able to pay on its rated debt obligations in full on a timely basis~l

Thereliability of the credit rating; in terms of their ability to predict de~ault is carried outthrough an analysis of default studies published by rating agencies. Th default rate for aspecified period is the number of defaults among rated entities d ring the period,expressed as a percentage of the total number of rated entities W ose ratings wereoutstanding throughout the period. If the credit ratings are reliable, the default ratesshould decrease as one moves up the rating scale, a property w ich is termed as'ordinality' .

CRISIL would like to highlight that none of the debt instrumen s rated AM byCRISIL have ever defaulted right from 1988 when CRISIL assign d its first creditrating till date; this is true for those instruments issued by entities in the public sectoras well as the private sector (see Table I and Table 2). These AAA ra ings are assignedacross sectors including manufacturing and financial sector.

The default experience, spanning 22 years, of private sector AAA-rate entities has beenas good as that of the public sector AAA-rated entities. Further, these trends have beenobserved across almost 548 issuer-years, which is quite a large samp e size of privatesector entities.

5S

Table 1: Default Rates of CRISIL rated AAA eaterprises(Avera ze 1988-2009)

IrYpe of Issuer Issuer-Years One-Year Two-Year Thre~-Year!public 325 0.00% 0.00% O.I~%!private 548 0.00% OJ)O% O.~%

Table 2: Default Rates of CRISIL rated AAA enterprtses(Average 2000-2009)

67 ~.OO% 0.00%

Type of Issuer Issuer-Years !One-Year Two-YearjI'hre«-Year

PublicPrivate 02 ~.OO% O.OO~~

The default rateshave remained at 0 for a twenty-y~

s{,

I

.:Hn~\!W

There are many examples of private sector entities sustaining 'AAA' rating over a significanttimeframeThere are many private sector enterprises that have sustained CRISIL 'AAA' ratings over long periods of time, as shown in Table 3.CRISIL has not carried out any large-scale downgrades of private sector entities rated 'AAA'.

Table 3:Illustrative list of entities in the private sector which have sustained a 'AAA' rating from CRISIL over a significant timeframeCompany 198919901991 199219931994 1995 19961997 19981999~OOO~001~002~003~004 2005~006 ~007~008~O09~sian Paints Ltd. IAAA IAAA IAAA IA..AAI1f.A AAA AAA AAA AAA AAA AAA IA,.AAIAAA AAA~~ajaj Auto Ltd. IAAA IAAA IAAA AAA 'AAA AAA AAA IAAA IAAA [AAA I~AA I'<\A~ AAA MA AAA '<\AA A!I..A AAA IAAA IAAA AA..A~BASF India Ltd. iAA+ AA+ IAA+ AAA AA'A AAA AAA AAA AAA AAA. AAA .<\AA A..AA

Cyrus Investments Ltd. AAA A'A'A AAA AAA iAAA IAAA AA.A A..AAAAA AAA

HDFC Ltd. ~AA AAA W AAA AAA AAA AAA W AAA AAA AA..AAM. A.AA AAA AAAICICI Bank Ltd. W AAA AAA AM AAA A..AAAAA AAA A.A.A.<\lAp.A..AAAA..AA,.AA

Infosys Technologies Ltd. iAA AA AA AA AA A,A AM IA.M lAM IAAA IAAA 1AAJ:..:.<\A.AA.AA AAA IA,.AA

Larsen and Toubro Ltd. A..AAAAA VA AAA AAA ~+ ~+ IAA+ AAA IAAA •.<\A.A.<\A.AAAA AAA :,

AAA IAAA IAAA IAAA IMA I.<\AA'AAA A.AA A.AA 'AAARabo India Finance Ltd.Reliance Industries Ltd. AA+ AA+ IA..AAA..AAAAA AAA AAA AAA A.A.AiA..AAIAAA 'AAA i'<\AAI;\AA 'AAA AA}. A..AA'A..AA :Siemens Ltd. AAA AAA IAAA IAAA IMA I.<\A.AIAAA 'AAA A..AAAAA 'AM-Tata Sons Ltd. A..'A;\A..AAAAA AAA AAA AA..AA..AAIAAA IAAA AAA MA IAAA AAA AAA AAA AAAUltraTech Cement Ltd. AA+ AA+ AA+I AA+ AAA AAA

Bharti Airtel Ltd. AAA AAA lliAA A..AAAJ\j.HDFC Bank Ltd. AAAI AAA AAA AAA

s?-

Q

c:t:

c ~

r:t>

rt:

c:(

cc(

c(

(

(

(

(

(

(

(

(

(

Characteristics of' AAA' rated instruments issued byprivate sect r entities

While assigning credit ratings, CRISIL emphasises the business ris the financial riskprofile of the entity, its management quality, and any support that is xpected on accountof its ownership by a strong parent, corporate group or gove ent. The analysisinvolves an objective assessment of various quantitative and qua itative parameters.Hence, ratings adequately capture the risk profiles of rated entities. CRISIL would notsuggest that investment guidelines contain further stipulations on inimum networth,financial ratios, etc.

Some additional points which EPFO may consider while permitting investments in'AAA' rated instruments issued by private sector entities are as fOlloWr .

I. The instrument should be assigned by at least two rating a ncies which havepublished default rates covering a period of at least 10 years. is will ensure thatthe default rates of these rating agencies are reliable enough for the EPFO to maketheir investment decisions- Smaller periods like the last 3 y ars or only last 5years "may not be adequate enough to establish the reliabi ity of the defaultstatistics ofa credit rating agency.

2. The company issuing the debt instrument must have a track ord of 5 years ofprofits and dividend payment.

r-- - - --- - --.-,-,","""\"""\ ~ ~ ~ ) ~ ) ) ) ) )

-Pt nY1~\"fYl' ~ (S1 ':

41

5~

.-~

\

>.~.~;;c?;r,P"

•

(,-

r-r ~-,""

r"r(

rr(

rcc(

(

(

(

l.

101m«tingofFlC-26.11.2010

Item No.9:- Inyestm~t in Dual AAA (SO) rated tegory - ClarificationsOught by Fund Managers - Ratif"1Ca. n thereof and furtherapproval to continue in this category.

1. In PSU/PSFI category sometimes new companie are formed by CentralGovernment I State Governments to achieve spec fie objectives e.g. IndianRenewable Energy Development Authority (IRE A), India InfrastructureFinance Company Ltd. (llFCL) etc., as a special p rpose vehicles to arrangefinance for public sector undertakings engaged in i frastructure developmentactivities like road construction, Aviation, Airport ren vation, Metro Rail etc..

2. Similarly such undertakings do not have a big ca ital base nor have highprofitability, so cannot get a good rating on the sis of their independentbalance sheets and financial position. Central Go ment comes forward toissue letter of comfort for assuring payment of prin pal and interest or issuesan unconditional, irrevocabte Guarantee for the ment of prirlcipal andinterest amount of the Bonds till their matwity and nal-redemption.

3. Based on Central Government Guarantee; Credit ra 'ng Agencies award AM(SO) i.e. a structured obligation which are 100% e and secure. The yieldon such bonds is also attractive and nonnally 20 0 30 bps more than thecorresponding tenure of PSU bonds as per the pre ailing rate of interest inthe market.

4. Some of the Fund Managers have not invested in th se securities which haveresulted in loss of opportunity of higher yields. y have decided not toinvest on the grounds of standalone assessment f the undertakings andignoring the rating based on structured obligation. While some other fundmanagers have taken a different view and invest to capture the higheryields, as they have assessed such issues a safe i vestment like other AMinstruments.

5. All such Bonds having unconditional & irrevocable uarantee for all interestpayments and principal repayment till maturity, by the Central Governmentand rated as AM (SO) would be treated at par with he 'MA' rating.

The proposal as outlined above in Para 5 is piand recommendation to the CBT.

for consideration