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Journalism of Courage
Though the Rs 104,000 crore Employees Provident Fund Organisation (EPFO) has had only two defaults in recent years (one from IFCI and the other from HMT), it has suggested a slew of measures to the Finance Ministry to take care of the increasing prospects of defaults from PSUs — the proposals were sent through the labour ministry. The finance ministry, however, has not replied on the matter for over six months already.
Essentially, the EPFO’s point is that since there are increasing defaults by both public sector units as well as government-owned financial institutions (FIs), it should be allowed to sell off its holdings in them even before maturity. Currently, the EPFO’s various funds are forced to hold on to PSU and FI bonds till the date they mature. Thus, for example, the EPFO has a little over Rs 1,000 crore invested in IFCI bonds — now since it is well known that IFCI was in trouble for a long time, the EPFO could have sold its IFCI holdings, even if at a discount. The EPFO has another Rs 4,000 crore invested in IDBI, another FI that isn’t quite in the pink of health. Of its total corpus, around Rs 8,000 to 10,000 crore is invested in PSUs and FIs such as IFCI and IDBI. Under the current law, of the net fresh accruals (that’s new deposits minus payments and advances), 25 per cent has to be deposited in central government securities, 15 per cent in State government securities, 40 per cent in PSUs and FIs, and the balance 20 per cent in residual securities (that’s any of the earlier three categories).
The EPFO has now suggested that the category of PSUs and FIs be reduced by half—so, just 20 per cent of its net fresh accruals will have to be invested in either PSUs or FIs. It has suggested that the residual category of investment be doubled, to 40 per cent.
And to further insulate it from PSUs and FIs getting into trouble, the EPFO has asked that it be allowed to invest in bank FDs, NSCs, Post Office deposits instead—that is, investments in these securities should qualify as investments in PSUs and FIs.
The EPFO has also asked for permission to be allowed to trade in government securities. Around a third of its total portfolio is in tradeable government securities, and since these are old ones, they carry a high rate of interest. If the EPFO is allowed to trade in government securities, then it will be able to make good profits by selling parts of its old securities. Sources say the earnings from this could be a few hundred crore every year. The EPFO has Rs 25 crore invested in HMT, and the PSU began defaulting on this in 1999. Sources, say, however, an agreement has been reached—HMT will issue government-guaranteed bonds for the amount, and will pay the EPFO a 16 per cent interest rate till the original date of maturity. For the period after that, it will pay the interest rate paid by the EPFO to its 3 crore subscribers every year.
The IFCI default began in November last year. No solution has been reached on this so far, and all depends on the IFCI bailout package being drawn up by the finance ministry. The Punjab State Industrial Development Corporation had defaulted on a Rs 5 crore investment last year, but this was made good.
