IL&FS default: EPFO moves to secure risky investments, may stall rate hikehttps://indianexpress.com/article/business/companies/ilfs-default-epfo-moves-to-secure-risky-investments-may-stall-rate-hike-5801612/

IL&FS default: EPFO moves to secure risky investments, may stall rate hike

EPFO’s investment in IL&FS is pegged at Rs 574.73 crore, while investments by exempted firms, which manage EPF accounts on their own for their employees, is over and above this amount.

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Labour Ministry is learnt to be reconsidering its decision to hike the interest rate

WITH IL&FS making its first default in the interest payment of Rs 21 crore to the Employees’ Provident Fund Organisation (EPFO), the retirement fund body is taking “all possible steps” to secure its other bleeding investments, including in Reliance Capital, YES Bank and DHFL, officials indicated.

While the ensuing impact of these investments on the Fund’s accounts is also being monitored by the Ministry of Labour and Employment, there is an emerging consensus that the recommended 8.65 per cent interest rate for 2018-19 — the first hike in three years — looks increasingly untenable.

“IL&FS made one default of interest payment of Rs 21 crore before March 31. It was making interest payments till January. The fund managers have been asked to do due diligence for all such investments and the situation is being closely monitored,” an official said.

The Finance Ministry, which is yet to give its final nod for the rate hike recommended by the EPFO’s Central Board of Trustees (CBT), had already flagged the IL&FS investment and those in other risky entities in a missive to the Labour Ministry in May.

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The Labour Ministry is learnt to be reconsidering its decision to hike the interest rate, an issue which is likely to be taken up in the next CBT meeting that is expected to be held after the current session of Parliament.

The EPFO is also making efforts to avail partial redemptions of investments in several debt instruments and has also directed its fund managers not to invest in private bonds for now. “We have restricted them from investing in private bonds since this is not the time to invest in them. So they will invest as per as the (approved) pattern of investment,” the official said, adding that the fund is also applying the early redemption clause wherever possible.

EPFO’s investment in IL&FS is pegged at Rs 574.73 crore, while investments by exempted firms, which manage EPF accounts on their own for their employees, is over and above this amount.

In February, the CBT of the EPFO had recommended hiking the interest rate for its 6-crore active subscribers to 8.65 per cent for 2018-19 from a five-year low of 8.55 per cent in the previous financial year. At 8.65 per cent, the interest rate would be at the same level as in 2016-17 and the EPFO will be left with a surplus of Rs 151.67 crore.

Retaining the previous year’s rate of 8.55 per cent would have resulted in a surplus of Rs 771.37 crore, while an interest rate higher than 8.65 per cent would have resulted in a deficit. As per convention, after the EPFO’s CBT recommends the interest rate, it has to be ratified by the Finance Ministry before being credited in the accounts of subscribers.

The recommendation to hike EPFO’s interest comes at a time when most other small savings instruments offer an interest rate below 8 per cent and amid downward direction in rates set out by the Reserve Bank of India (RBI).

Small savings rates, which are linked to yield on government securities, are reset on a quarterly basis. For the January-March 2019 quarter, the government had kept rates for most schemes unchanged compared to the previous quarter. The rate on Public Provident Fund (PPF) scheme was also kept unchanged at 8 per cent in the January-March quarter.