The constant tussle between the finance ministry and the labour ministry over the former wanting the Employees Provident Fund Organisation (EPFO) to invest a percentage of the massive `5,00,000 crore employees provident fund seems to be going nowhere. To be fair, they both have a point. The government feels that the employees provident fund (EPF) will earn better returns through investing a percentage of its funds in the equity markets. Today it earns very low returns with the result that retirees get a measly `200-`300 a month. It invests mostly in government bonds and these bonds are said to give six per cent less returns than equities. The labour ministry says it has no problems about investing a percentage in the equity markets provided the government gives a guarantee on the safety of the funds and a reasonable rate of return. It feels that if the finance ministry thinks the equity markets are so good, there should be no problem in providing this guarantee. It has informed the finance secretary accordingly and the matter seems to have rested there last week.
Votaries of the stock market are hugely in favour of investing a percentage of the EPF in the stock market. They say the stock markets are the best place to make money as long as one invests long-term and does not speculate. They, of course, admit that with such a large corpus, even if one per cent is invested in the market, it would mean around `50,000 crore? It is a huge amount, which would certainly make any administrator greedy. So one would have to have very stringent guidelines, as leak-proof as possible, regarding how the money is to be invested. Vested interests who influence decision-making with kickbacks have to be eliminated. Like, for instance, there could be a provision that fund authorities should invest only in good companies. For example, the returns from the IPOs of public sector companies are far better than the private sector IPOs. The returns from IPOs of PSUs between 2001-09, according to one study, were 32 per cent compared to the returns from private sector IPOs that were a mere 12 per cent in the same period. You don’t have to be brilliant, but you need to be prudent while investing in the market.
Those against a portion of the funds going into equity ask how long is “long-term”. The PF authorities have to pay out money monthly. Also, we are lucky that the bear market of 2007-08 lasted just a year. If it had lasted longer, there would have been huge problems, even for long-term funds. One can never predict the market. Another problem is the risk involved because of the high mortality rate of companies. Of the 10,000 IPOs that came between 1992 and today, only about 5,200 companies have survived. The fate of the companies that were listed on regional exchanges and which are now defunct is not known. This indicates that the risk rates are very high and a cruel joke on investors.
Globally pension, provident and insurance funds are used for long-term infrastructure projects, which require long-term funding. But globally the governments have social security and other schemes for people in retirement, which the Indian government does not. The bulk of the middle and lower income group largely depend on their provident fund, and that is why these funds have been kept away from the equity markets. If PF and pension fund monies are lost, there would be a huge political backlash. People, and also the EPFO, don’t mind low growth in wealth. What they don’t want to see is de-growth. Stability is important to them.