The government on Thursday bypassed the Employee Provident Fund Organisation's (EPFO) Central Board of Trustees (CBT) and announced a 5 percent hike in equity investments. India's labour ministry, the nodal ministry of the retirement fund EPF, noted in a press statement, "Considering the good returns in ETF investment, the government has decided to enhance the investment from present 5 percent to 10 percent for the financial year 2016-17."
BloombergQuint had earlier reported that the government is mulling a marginal hike in equity investments of the Employee Provident Fund (EPF) from the existing threshold of 5 percent of the pension fund’s corpus following an interview with Labour Minister Bandaru Dattatreya on July 7.
After the enhanced limit, up to Rs 13,000 crore of EPF monies can be invested in Exchange Traded Funds (ETF) benchmarked to the Nifty 50 and Sensex. SBI Mutual Fund and UTI Mutual Fund have been appointed as the asset managers for this amount
The finance ministry allowed the EPF to invest up to 15 percent of its investible funds in equity and equity-related schemes. Of the 15 percent, the retirement body had invested 5 percent of the corpus, amounting to Rs 6,577 crore in FY16.
Traditionally, the EPF had invested this amount in low risk and assured return investments, such as government issued bonds.
Cost Of Bypassing The CBT
The government was prompted to bypass the CBT, the constitutionally appointed administering body of EPF investments, after opposition from trade union representatives.
In a meeting held in July 2016, trade unions had sought assured returns to allow a further hike in investments.
Virjesh Upadhyay, an employee representative in the CBT had told journalists, “We want the government to assure capital protection before allowing further participation in equities. The unions will oppose any move from the government to hike investments.” Upadhyay is the All India General Secretary of the Bhartiya Mazdur Sangh, a right-wing affiliated trade union.
The CBT is responsible for administering the EPF corpus. The 43-member body takes decisions on the functioning of the EPFO by vote. Chaired by the labour minister, the CBT has 10 employee representatives, 10 employer representatives and rest are state and central government appointees.
Labour Secretary Shankar Aggarwal told journalists that the CBT's nod was not needed for hiking investments. He said, "The government (labour ministry) is over and above the board.
Senior lawyer specialising in labour laws and former Panel Advocate of EPFO, AK Chandok told BloombergQuint in a telephonic interview that the move to bypass the CBT can be challenged in court. He explained, "The decision to bypass the CBT is an over utilisation of powers by the labour minister. Individual members of the CBT opposed to the decision, trade unions of any state or national level can challenge this move in a court of law. Since the amount is high, aggrieved parties can approach the Supreme Court under its original jurisdiction."
High Returns From Equities?
The government has also noted in a press statement that the existing investment has yielded a return of 13.24 percent. Central PF Commissioner, VP Joy clarified to BloombergQuint in a telephonic interview on the nature of these returns. He said, "This is the growth in market capitalisation of the EPF's investments."