Govt may ask EPF to invest in private bonds

NEW DELHI: The government is tentatively exploring the possibility of convincing the Central Board Trustees of the Employees Provident Fund (EPF) to invest in private bonds and equity mutual funds for garnering better returns on investments.

The fund has been, for the last three years, facing a resource crunch which has prevented it from paying a high interest rate to its over four crore subscribers and the crucial issue of investment options for higher returns is expected to get prime time when the CBT meets to decide on the interest payout for 2007-08. The meeting is likely to happen only after December 7, when the current session of Parliament ends.

“They (the Central Board Trustees) have already rejected the option of investing a part of their substantial corpus in the capital markets. So we are mulling the possibility of bonds and mutual funds in the equity market,” government sources said.

It is understood that the private bonds proposal is being posited as viable option for investment since it would fetch higher returns compared with government bonds and yet not expose workers’ savings to the constant upheavals in the stock markets, on Thursday, the Sensex lost 678 points (3.52%), the third biggest drop in a single day, that the Unions have pointed to time and again as a deterrent to investment of funds.

Private bonds, as opposed to government bonds, offer a higher interest rate but also spell a higher risk. The issue has yet to come up formally before the CBT but Trade Unions are already showing signs of gearing up to oppose the proposal.

“We have already rejected the option of investing 5% of our corpus in the capital markets. This is just a move to push the same through the back door. A good sum of EPF funds are already invested in government securities and bonds. But they offer an interest rate of only around 7.5% while we have been demanding that the government hike up the 8% interest rate it offers on the Special Deposit Scheme where an enormous part of the EPF corpus is invested,” TU sources stressed.

What could, however, chip their alternative argument for a higher interest rate on the Special Deposit Scheme (SDS) in which 65% of the enormous corpus of the Fund is invested, would be the fact that bank interest rates currently show signs of softening.

Commercial banks, they argue, offer up to 9.5% returns on fixed deposits, depending on the tenure. Some unions such as the CPI(M)-affiliated Citu have floated the possibility of linking payouts to subscribers of the EPF to bank interest rates, this has so far found no serious debate.

The SDS, which holds EPF funds to the tune of Rs 94,000 crore-odd , earns only 8% interest rate for the Fund currently. At the EPF Board’s July meeting this year, key TU demanded that the interest rate for SDS investments be hiked to 9.5%, pointing out that despite being workers’ fund, the government, which was deciding on the interest rate to be paid out, despite being the borrower, was using EPF resources virtually as a captive low interest borrowing to fund its programmes.

The reality is that this 8% interest paid on SDS deposits is higher than the interest the government would have to pay on its borrowings from the market. Significantly, that controversial majority decision of the Board in July this year, it decided on an 8.5% interest payout to EPF subscribers, given the prevailing fund crunch, had meant an extremely delicate balancing act.

An 8.5% interest rate left the EPF with a paltry balance of Rs 83 crore after paying out liabilities of Rs 7822.57 crore in all against an income of only Rs 7372.67 crore for the year. The payout itself was made possible only after tapping Rs 347 crore-odd from the Interest Suspense Account and another Rs 185.69 crore from the Contingency Reserve Fund (CRF).

Only the balance in the Special Reserve Fund (SRF), a paltry Rs 56.69 crore remained untouched. Under normal circumstances, the sorry state of the kitty could make it all the more imperative for the CBT to urgently reconsider the option of investing in the capital market.