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The
Fallout of the EPF Interest Rate Hike
On
May 28, 2005, bowing to political pressure, the Employees' Provident
Fund Organisation's ("EPFO") Board of Trustees ("Board"),
confirmed the interest rate of 9.5% for fiscal 2004-2005. This
rate was earlier proposed by the Ministry of Finance ("MoF"),
Government of India. Mindful of the rate of return on the fund,
currently at 8.7%. The Board had earlier recommended an interim
rate of a more realistic 8.5%. The declared 1% hike translates
into a yawning deficit of INR 7160 million (approximately USD
165 millon) in the EPFO account.
EPF
contributions are invested in government-approved securities and
bonds of companies. Previously, the EPF could offer a higher rate
of return by investing around 70% of the corpus in Special Deposit
Schemes ("SDS"), which gave a 12% return. Today, the SDS
rate has sunk to 8%. The EPFO's request to increase the present
interest rate on SDS has reportedly been turned down by the government.
Postal schemes, which offer high returns, are of no use since
institutions cannot invest in these.
The
MoF has also declined to bail out the EPFO and hence it would
be compelled to dip into its Special Reserve Fund ("SRF")
[currently at INR 9,500 million (approximately USD 219 million)]
for the 2004-2005 payout to its 400 million members. The SRF has
been painstakingly built up over several years out of the forfeited
contributions from employers, plus interest.
To
enable the funds to increase its earning potential, the government
notified a new investment regime from April 2005, allowing non-state
provident, superannuation and gratuity funds to invest up to 5%
of their assets in equities and up to 10% in corporate debts and
equity-oriented funds. The EPFO, however, claims that it has neither
the expertise nor the inclination to invest in equities.
The
Employees' Provident Fund Scheme, 1952 ("Scheme") is governed
by the Employees' Provident Fund and Miscellaneous Provisions
Act, 1952 ("Act"). Under S. 17 of the Act, private companies
are exempted from the Scheme provided such companies set up private
trusts for the administration of their employees' provident fund.
Such companies are required to offer, as per the Act, a rate of
return which is "not less favorable" than that declared for the
EPF. Thus the private company provident funds would also be required
to pay the high 9.5% rate of interest. At this rate, the total
shortfall for privately-managed funds is estimated at INR 5,000
million (approximately USD 115 million).
What are the
solutions for EPF trust managers? They
could:
-
identify a good investment scheme to seek a return of around
9%.( In fact, many privately-managed funds have been invested
in state governments' securities. However, the expected yields
have not been forthcoming due to delayed payments.)
-
surrender the privately-managed funds to the regional Provident
Fund Commissioner, which would compel the government to meet
the deficit
-
invest
in high-yielding junk bonds, with the attendant risk of defaults
- take a
loan from the company to meet the deficit, repaying the amount
over the years.
The government,
well aware of the crisis that it has unleashed, has already proposed
that in fiscal 2005-2006, the interest rate of the EPF should
be pegged at a more sensible 8%. However, for the current fiscal
the funds are plunged into deficit.
Source:
The Employees' Provident Funds & Miscellaneous Provisions Act,
1952
The Times
of India, Mumbai Edition, May 29, 2005
The
Economic Times, Mumbai Edition, May 29 & 30, 2005
The Hindu Business Line, Mumbai Editon, May 29,2005 www.karnal.nic.in
www.Sify.com
www.Rediff.com
You
can direct your queries or comments to Daksha
Baxi or Rina
Kamath
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