Why pensioners get short-changed

So how do Chilean or the other provident and pension funds manage to generate such tremendous returns? More so, if you consider the fact that interest rates on deposits are far lower than they are in India most provident funds in India afterall generate income by investing their corpus in fixed deposits of various types. The answer8217;s simple: they don8217;t invest that much in fixed deposits, but also make large investments in equity. And it8217;s well-established that, in the long-run, the returns on even the most prudent sort of equity investment far outstrips that on fixed income investments such as bonds, debentures and just plain fixed deposit schemes.

Around 40 percent of the corpus of government-run pension funds in the US is invested in equity and this goes up to 65 percent for privately-run pension funds.

Contrast this with India where, forget about investing in equity which is still prohibited by law, provident funds do not even invest in the slightly higher interest bearing debentures of blue-chip corporates. Finance Minister Yashwant Sinha8217;s last budget allowed provident funds to invest upto 10 percent of their incremental deposits in this manner, but the board of trustees of the Employees Provident Fund Organisation which controls 70percent of all provident funds in the country refused to do so.

And while it8217;s easy for us to make fun of their excessive caution 8212; what, after all, can go wrong with a debenture issue of say a Telco or a Reliance 8212; let8217;s also be realistic about the happenings in the country8217;s stock markets and the cynical manner in which various governments have gone about tackling the problem. In the event, it8217;s understandable for managers of provident funds to take the view that it8217;s better to get a lower return but to preserve one8217;s capital, than to wipe out the capital itself. Of the 4,000 public issues in which Rs 44,000 crore was raised between 1992 and 1996, for example, around 3,000 are quoting well below par.

It8217;s fairly well-reported by now, for example, that despite the experience of the Harshad Mehta-led stock market scam of the early 90s, Mehta8217;s back in action, manipulating select stocks with relative impunity. SEBI, of course, continues to play the toothless or reluctant watchdog, depending on whetheryou want to be charitable or truthful.

Similarly, nowadays the buzz in the government which has finally woken up to the problem, is vanishing companies8217;. That8217;s companies which had promised to list their scrips on one of the country8217;s four major stock exchanges when they raised funds in the stock market boom, but failed to do so, and vanished8217; as it were. Much of the government and SEBI appear to have got into a tizzy about this a year after this was first brought out!, but are tackling this in the wrong way.

No one, for example, has bothered to ask the financial institutions or banks which lent money to these companies why they didn8217;t do anything about this 8212; after all, it is the obligation of banks and financial institutions to see that their own loans are safe. It8217;s equally true that while all loan agreements have convertibility clauses in them, to allow banks/institutions to convert their loans into equity, no institution has ever exercised this clause to throw out a bad promoter. Examples aboundof how promoters of even well-known companies have siphoned off funds with the institutional nominees not even bothering to inquire as to what was happening.

In a recent example which was brought to the attention of the RBI by one of the country8217;s investigative agencies, the RBI wrote to the institution concerned for an explanation. Around a year later, the RBI pleaded helplessness, saying the institution had not replied to it! Nor does any one in the government any government, not just the BJP one really come down too heavily on the institutions since, time and again, these very institutions are asked to buy or sell equity of certain corporates, for one reason or another which is not always altruistic.

Nor do stock exchanges or the registrars of companies who are statutorily supposed to ensure that companies file their balance sheets and annual reports with them, do much to ensure compliance. When SEBI wrote to all registrars in 1996 asking for information on companies that floated public issues in1994-95, for example, it found that only 52 out of 137 companies in Ahmedabad for example had filed their returns; 95 out of 209 in Mumbai; details for 125 companies registered in Delhi are still to be furnished, nearly three years after SEBI first asked for this information!The country8217;s working classes are truly in a bind.

They don8217;t want to invest in the stock markets since they8217;ve burnt their fingers badly and things don8217;t look much safer today. Unfortunately, the money they save in provident and pension funds isn8217;t doing too well either, for much the same reason.