The Central Public Sector Enterprises (CPSEs) were allowed to invest their surplus funds in SEBI regulated public sector mutual funds only, where the government holds >50% stake. Surplus funds refer to funds still available with CPSEs after meeting the business requirements, including operating expenses, tax payment, working capital, debt servicing, and capital expenditure.

The original guidelines issued by the Department of Public Enterprises (DPE) dated May 08, 2017, on investment of surplus funds by CPSEs deals with the management of these surplus funds to prevent it from lying idle and instead generate returns by investing in valuable government-backed instruments.

However, on December 05, 2022, Wednesday, Finance Minister Ms Nirmala Sitharaman, in an office memorandum, permitted the CPSEs to invest their surplus funds in debt-based schemes of all mutual funds (private sector as well).

The Department of Investment and Public Asset Management (DIPAM) has issued modified guidelines on the investment of surplus funds by CPSEs. These guidelines have been amended in view of time-to-time representations received from some CPSEs, mutual funds, and private sector banks suggesting changes in certain provisions of the guidelines keeping in view liberalisation policies and the introduction of new monetary instruments for trade-in short terms funds.

According to the DIPAM, these proposals have been examined by the inter-ministerial Committee for Monitoring of Capital Management and Dividends in CPSEs (CMCDC), which currently considers all capital restructuring matters of CPSEs. Based on the recommendations of CMCDC, the modification of existing guidelines on the investment of surplus funds by CPSEs is as under:

Revised provisions in the existing clauses:

  • Clause 8 (v) – Investment in Collateralised Borrowing And Lending Obligations (CBLOs) where the Clearing Corporation Of India Ltd. (CCIL) acts as counterparty. The revised norms allow CPSEs to invest surplus funds through the Triparty Repo System (TREPS) and Clearcorp Repo Order Matching System (CROMS), where the Clearing Corporation of India Ltd. (CCIL) acts as a central counterparty.

  • Clause 8 (vi) (a) – Only Maharatna, Navratna, and Miniratna CPSEs like National Thermal Power Corporation (NTPC), Oil and Natural Gas Corporation (ONGC), and Steel Authority of India Limited (SAIL), etc., are permitted to invest in debt-based schemes of SEBI regulated public sector mutual funds. Whereas as per modified guidelines, the above-stated CPSEs are allowed to invest in debt-based schemes of all mutual funds.

  • Clause 8 (vi) (d) has been deleted during the modification of existing guidelines on the investment of surplus funds by CPSEs.

Besides mutual funds, CPSEs may also invest surplus funds in T-Bills, G-secs, term deposits of commercial banks, commercial papers of banks and other public sector undertakings. CPSEs are requested to ensure compliance of these amended guidelines. Do note that the maturity period of any instrument of investment by CPSEs shall not exceed one year from the date of investment, except for term deposits with banks and government securities, which can extend up to three years.

Investment shall be made by CPSEs keeping in mind the safety of funds while earning some returns using appropriate financial/money market instruments as mentioned in the guidelines. Investment in debt mutual funds shall not exceed 30% of the available surplus funds of the concerned CPSE.

There shall be no speculation on the yield obtained from the investments. However, in the case of investment in marketable debt­ instruments (viz., mutual fund debt instruments, Government securities, and T bills), there is a risk that the final yield may differ from the yield estimated at the time of investment due to movement in prices of the security. Since investment in debt schemes of mutual funds are subject to market risks, the track record of the scheme shall be considered for taking investment decisions. This move will assist CPSEs in increasing the return on their surplus funds, which will enhance their profitability.

How will this modification in Guidelines of investment of surplus funds by CPSEs impact the Indian debt market?

With considerable changes occurring in the domestic economic environment and a number of potential legislative reforms, the Indian debt market and the government securities market, in particular, are at a turning point.

Debt mutual funds have been a significant intermediary in financing corporate and governmental debt securities over the years, contributing to the economy’s growth. Until now, only public sector mutual funds, including SBI, UTI, LIC, and Union, among others, have been approved to manage CPSEs’ surplus funds. As per the modified norms, debt-oriented schemes of private sector mutual funds now stand to benefit as well. This move by the government could encourage substantial inflows into debt mutual fund schemes.

The Indian debt market has seen outflows in a number of debt mutual fund categories, with heavy withdrawals occurring in the liquid, money market, and ultrashort-term duration fund segments. A rising interest rate environment is not favourable for debt fund and has likely resulted in investors preferring to move out of the debt markets. However, this step by the government allowing CPSEs to trade in short-term debt mutual funds of the public as well as private sector will strengthen the inflows in the debt market and lead to the overall development of the market.

This article first appeared on PersonalFN here

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