The government appoints private companies to manage EPF deposits amid trade union opposition.in New Delhi
With less than a year to go for the Lok Sabha elections, at least two Union Ministries seem to be in a terrible hurry to fulfil the unfinished economic reforms agenda of the government. On July 29, despite strong opposition from all Central trade unions except one, the Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO) under the Ministry of Labour and Employment appointed three private fund management companies, along with the State Bank of India (SBI), to manage its corpus. The decision to appoint private fund managers HSBC Asset Management Company (AMC), ICICI Prudential (AMC) and Reliance Capital (AMC) is itself a radical departure from the system that has existed so far, in which the SBI has been the sole manager of EPF funds. Trade union leaders say the manner in which the fund managers were appointed is questionable.
The Ministry of Labour and Employment claims that the selection of the fund managers, made with the help of the credit rating agency CRISIL, has been transparent enough. Of 21 applicants, 17 were considered for technical bids, and later 10 among them were short-listed for financial bids. The CBT finally selected four fund managers. About Rs.30,000 crore would be available as incremental accretion to the selected fund managers, and the proportion in which they are expected to manage the monies would be decided later. They would also render custodial services for maintaining the previous investment currently held by the SBI.
The EPFO is one of the largest provident fund institutions in the world in terms of members and the volume of financial transactions. The provident fund corpus contains the savings of around 4.5 crore workers. It is managed by the tripartite CBT consisting of representatives of the Central and State governments, employees and employers. Apparently, when trade union representatives on the Finance and Investment Committee (FIC), a sub-committee of the CBT, opposed the move to privatise EPFO funds, they were assured that the matter would be debated further in a full meeting of the CBT. However, the union leaders say they were not privy to the process by which CRISIL got a role in the selection of fund managers.
The trade unions, especially the Centre of Indian Trade Unions (CITU), allege that the late inclusion of Reliance Capital AMC in the shortlist was a reflection of the changed political scenario in the country and new alliances at the Centre following the trust vote. It is ironical that while it is the workers money that is in the provident fund they do not have any right to decide what to do with their money, M.K. Pandhe, president of the CITU, told Frontline.
The appointment of fund managers raises questions, say the trade unions. In fact, their opposition to it was overruled by what Labour Minister Oscar Fernandes claimed was a majority decision. Of 40 members in the CBT, only 10 represent employees. The worker whose money is lying in the corpus is in a minority, and the government says it is a majority decision, said Pandhe.
The Bharatiya Mazdoor Sangh (BMS), the All India Trade Union Congress (AITUC), the Hind Mazdoor Sabha (HMS) and the United Trade Union Congress (LS), too, opposed the move. Even the Indian National Trade Union Congress (INTUC), the trade union wing of the Congress, did not support the governments decision strongly. It is another matter that it did not oppose it either.
The trade unions, Pandhe said, were not against depositing the money in fixed deposits, debentures, and so on, but they feared that the government was keen to invest the corpus in the speculative market. He said that past experiences the world over showed that provident fund money diverted to the share market caused immense losses to workers.
As it is, the government has slashed the rates on special deposits from 12 per cent to 8.5 per cent. It is argued that with inflation at 12 per cent, and with interest rates on fixed deposits at 9.5 per cent and on provident fund deposits at 8.5 per cent, the real value of money has drastically come down.
On July 5, the 183rd meeting of the newly constituted CBT lowered the threshold limit for coverage of establishments under the Employees Provident Fund and Miscellaneous Provisions Act (EPF & MP Act), 1952, from 50 to 20 in respect of cooperative institutions using no electricity and from 20 to 10 in respect of other establishments. This will, in effect, widen the provident fund coverage. This is the first time in 48 years that the threshold limit has been revised to bring in more workers under the ambit of the Act, which means more funds into the EPFO. However, while doing this, the government deferred the issue of recommending a higher rate of interest to be credited to EPF members accounts for 2008-09, a demand which the trade unions had for long been making.
Trade union leaders feel that the government has all along wanted to privatise the provident fund organisation and that the inclusion of private fund managers is a step in this direction. They feel that by doing so, the CBT will become redundant as the investment would be done by private parties. The Board of Trustees exists on behalf of the workers and PF is a social security scheme. The Finance and Investment Committee of the CBT would be rendered meaningless if all the investment is to be done by these fund managers. Private sector banks are not into social work, said Pandhe.
He said there were enough examples from Indonesia and the United States to show how banks had to close down after the markets collapsed. He said that there was need for caution because a part of the provident fund money (8.5 per cent) also went into the pension fund. Even the returns on the workers investment would be decided by these fund managers and the rate of interest would be determined by the profits they make, he added.
W.R. Varada Rajan, a member of the Board of Trustees representing the CITU, said that though the CBT had accepted, in principle, the idea of introducing competition in fund management, mainly to explore avenues by which yields on investments of EPF funds could be maximised, nowhere was it discussed that asset management companies, which were entities operating in the shares and securities market, would be considered. He said the EPFO had sought a clarification from the government regarding the interpretation of Para 52 of the EPF Scheme wherein it is clearly laid down that all monies belonging to the Fund shall be deposited in the RBI [Reserve Bank of India] or the SBI or in such scheduled banks as may be approved by the Central government from time to time or shall be invested, subject to such directions as the Central government may from time to time give. The points it raised were, first, whether depositing and investing are two separate activities or can be treated as one; and second, whether an AMC or a Securities and Exchange Board of India (SEBI)-registered portfolio manager other than the RBI/SBI could make an investment on behalf of the EPFO while keeping the deposits in a scheduled bank.
Varada Rajan said that in December 2007, the Ministry of Labour advised that funds could be deposited in any other scheduled banks only with the prior approval of the Central government, but such interpretation could not be stretched to include Asset Management Companies and the funds cannot be invested/diverted to any other security other than those mentioned above.
He said the CBT had given its assent to a three-member committee set up by the Labour Minister to proceed with the selection of the fund managers with the assistance of the consultant. However, there was an explicit stipulation that the recommendations of the committee would be placed before the FIC for the final selection of the fund managers. The trade union representatives on the FIC, except the INTUC, protested against the inclusion of private fund managers.
A trade union member on the FIC told Frontline that the issue of having more fund managers was discussed in March 2008, but there was opposition to the appointment of private fund managers. According to A.D. Nagpal, representing the HMS on the FIC, the minutes of the meeting were not made available to the members.
At every stage, the trade unions had apparently suggested that public sector banks could be considered for appointment as additional fund managers. But even before the FIC or the CBT could have a look at the three-member committees proposal, financial bids were opened and the proposal was finalised on July 22, the day the government won the trust vote. The three-member committee short-listed the fund managers on the basis of the technical evaluation by CRISIL. Significantly, it excluded two companies that had quoted zero bids; that is, they had offered to be fund managers without charging any transaction fee.
The trade union representatives were obviously peeved by the unilateral decision of the three-member committee about the number of fund managers, the last-minute inclusion of Reliance Capital AMC and the allocation of funds among the various fund managers. On July 24, the EPFO convened a meeting of the FIC where the employee representatives opposed the inclusion of the private players. The representatives of the employers and the government held the opposite view.
Finally, on July 29, at a thinly attended meeting where only four out of 10 employers representatives, two out of 15 State government representatives and seven out of 10 workers representatives were present, the suggestion for considering public sector banks as additional fund managers was rejected. The argument was that the credibility of the EPFO would be eroded if the tendering process initiated by the three-member committee were to be scrapped at this stage.
Significantly, the voices of trade unions are getting muffled increasingly in tripartite bodies, including that of the EPFO. An example of this unilateralism is the governments decision to set up a Pension Fund Regulatory and Development Authority even when a Bill by the same name has not yet been passed. Some 30 lakh Central and State government employees who joined service after January 1, 2004, are covered by the Authority whereby 10 per cent of their salary gets deducted and deposited in a special fund. The scheme is not optional.
The Labour Ministry, in a sense, has taken upon itself to fulfil the unfinished agenda of the Finance Minister who stated soon after the trust vote that the government would make all-out efforts to take the process of economic reforms forward by passing a number of Bills pending in Parliament. He also indicated that the reform measures would be carried out through executive orders rather than by parliamentary approval. But it is easier said than done as not all political parties share the enthusiasm of the government.