In a further liberalisation of its financial sector, the central government Friday said non-state pension funds would be permitted to invest up to five percent of their portfolio in equities from April 1.

Such funds will also be allowed to invest up to 10 percent of their portfolio in debt instruments and equity-linked schemes of mutual funds approved by the Securities and Exchange Board of India, an official statement said.

In both cases, the instruments need to have an investment grade rating from at least two agencies.

The size of the Indian pension fund portfolio is estimated at Rs.3.5 trillion ($77.5 billion) of which 90 percent is controlled by state-run schemes and policies such as Employees' Provident Fund and Public Provident Fund.

In the revised guidelines, the government also lowered by five percentage points the 30-percent limit imposed on investments in bonds and securities of public financial institutions, state-owned companies and public sector banks.

The norms governing the pattern of investment by non-government provident funds, superannuating funds and gratuity funds were last revised in March 2003, the statement said.

"In the interest of providing wider avenues for investment by these funds, the revision in the earlier pattern has been approved by the government."

As per the revised pattern, these funds will be permitted to invest in term deposit receipts of public sector banks for a period of up to three years, as against the existing limit of less than a year.

The said funds have also been allowed to invest in bonds issued by public financial institutions and public sector companies if the issue is rated as investment grade by two credit rating agencies.

Collateral borrowing and lending obligations issued by the Clearing Corp of India Ltd and approved by the Reserve Bank of India have also been permitted, the government said.

The guidelines say that the maximum exposure of a pension fund in a gilt fund can be five percent of its portfolio at any point of time.

The trustees would be enabled to use at least 10 percent of the total portfolio of government securities for active management, subject to marking the portfolio on a marked to market basis, the statement added.