November 21, 2019 11:40:25 am
The board of directors of Bharuch-based Gujarat Narmada Valley Fertilizers and Chemicals Limited (GNFC), a Gujarat government-run Public Service Enterprise (PSE), recently asked its Employees’ Provident Fund Trust (EPFT) to focus on parking the provident fund money accumulated from employees, in government securities in near future. This move comes after the EPFT, belonging to GNFC, is staring at losses after investing in securities floated by crisis-hit Infrastructure Leasing and Financial Services Limited (IL&FS) Group.
After IL&FS went bankrupt, the GNFC, in its annual report, cited that GNFC-EPFT, which holds investments of Rs 41 crore in various long term secured and unsecured listed debt securities issued by IL&FS Group, might lose Rs 10.25 crore during the year 2018-19 alone. Similarly, EPFT belonging to another state entity — Gujarat State Fertilizers and Chemicals Limited (GSFC) — is estimating a loss of Rs 5.3 crore. GSFC-EPFT is holding investments aggregating to Rs 21.20 crore in debt securities issued by the IL&FS Group.
Why companies set up exempted PF trusts
Under the EPF scheme, the government has allowed some companies to set up their own exempted PF trusts by setting up a board of trustees to manage it. These trustees will include representatives from employees and management. The exemption to the EPFT can be withdrawn under various provisions, including if the company makes a loss for three consecutive years. Usually companies set up EPFTs to target higher returns than those provided by the EPFO. Exempted trusts invest in government securities as well as units of mutual funds that provide better earnings vis-a-vis the earnings generated through EPFO. This helps corporates provide better returns to employees. However, even officials in EPFO are unsure if the extra earnings of the EPFTs gets passed on to the employees.
At present, the IL&FS owns half the stake in another Gujarat government venture — Gujarat International Finance Tec (GIFT) City, and with its bankruptcy, the state government is looking for new partners to buy its stake.
The IL&FS crisis has provoked the Employees’ Provident Fund Organisation (EPFO) to conduct an audit of 30-odd Gujarat government owned companies that operate exempted EPFTs and have invested in securities and bonds issued by IL&FS Group or bonds of other entities that have now turned “junk”. EPFO fears that these EPFTs of Gujarat’s Public Sector Undertakings (PSUs) might be facing at a cumulative loss of over Rs 30 crore.
According to sources in the EPFO in Gujarat, the exposure of the EPFTs operated by 30-odd Gujarat government owned companies to bonds and securities issued by IL&FS would be over Rs 30 crore. “We are auditing all the EPFTs in Gujarat for their exposure to market instruments floated by the IL&FS Group. This includes the 30-odd companies of the Gujarat government and we are estimating that their trusts are have an estimated loss of over Rs 30 crore. These trusts are under stress as they have invested in companies like IL&FS and Punjab Financial Corporation, which have defaulted… So these trusts are making losses and a correct picture will emerge by December,” said an EPFO official on condition of anonymity.
Under the EPF scheme, the government has allowed some companies to set up their own exempted PF trusts and manage them in-house. Most of the PSUs operated by the state government have taken exemption under Section 17 of the EPFO. They are allowed to set up their own Employee Provident Fund Trusts or EPFTs, managed by a board of trustees comprising of equal number of representatives from employers and employees and headed by a chairman who is the CEO or MD of the company, under the supervision of the EPFO.
According to the Gazette notification of EPFO dated June 2015, the EPFTs will have to invest a minimum of 35 per cent of provident fund accumulations from employees in debt instruments and related investments. The maximum permissible limit is 45 per cent of such investments, which also includes securities with a minimum AA-rating.
When asked about the losses to the EPFT’s of state-run companies, Gujarat’s chief secretary JN Singh, who is also the chairman of GNFC and GSPC, told The Indian Express, “At one point, IL&FS was AAA-rated and was considered a secure company… There was a return of 10-11 per cent and so the money was invested there… There is nothing wrong in putting money in AAA-rated companies. It is being done with good intention.”
“If one wants a higher rate of interest or higher returns, then one has to invest in AAA companies. Usually, our companies invest carefully,” he said adding that IL&FS suddenly lost steam. When asked if there are other state-run entities whose EPFT has invested in IL&FS and lost money, Singh said, “GNFC has now decided that they will focus on investing in government securities. This was decided at the board meeting sometime ago.”
According to EPFO officials, sufficient provisions have been made to ensure that the employees do not end up being victims due to decisions of the EPFTs. “We have made provisions to ensure that whatever losses are incurred by the EPFT has to be made good by thecompany that operates it,” the EPFO official said. The minimum return that EPFTs have to provide cannot be less than the one fixed by the EPFO. For instance, according to the Union labour and employment ministry, a rate of return of 8.65 per cent is fixed for the current year.
Meanwhile, to tide over the expected loss to EPFT, the GNFC in its annual report 2018-19 states that it has provided Rs 10.25 crore, which is 25 per cent of the total investments of Rs 41 crore in securities issued by IL&FS Group “towards probable incremental employee benefit liability that may arise on the company on account of any likely deficit in the GNFC-EPFT in meeting its obligations”.
Similarly, GSFC in its annual report for the same year has made a similar provision of Rs 5.3 crore, “in view of uncertainties regarding recoverability of such investment”. Despite repeated attempts, the managing director of GNFC, MS Dagur, and managing director of GSPC, Sujit Gulati, could not be reached for comment.
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