How provident is this fund?


Indian Express, 10 March 2006

- Ila Patnaik

Do you know where your provident fund money is being invested? Are you
certain that your company is actually investing the PF contribution it
is deducting from your salary? Most people are keenly aware about
their consumption choices, but don't have a clue when it comes to
their financial savings. And, that is why it is important to regulate
provident and pension funds and keep an eye on what companies are
doing with their employees money. However, what Finance Bill 2006
proposes to do in this regard will cause more harm than good.

There are three possibile places your PF money could be in. First,
your money could be with the EPFO.  Second, your company could have an
'exempt fund', which is recognised by the EPFO and which pays you at
least as much interest as the EPF rate. If the company defaults you
will be looked after by the EPFO which will attach the company's
assets and try to get your money back. And third, your company could
hold your provident fund contributions in an unregulated 'excluded'
fund under which it is looking after the funds itself. It could be
that for employees with salaries below Rs.6,500 a month, the company
subscribes to the EPFO or runs an exempt fund, but for employees with
higher salaries, it runs its own scheme. It could even be that it is a
member of the EPFO for the basic contribution rate, but for additional
contributions it runs its own scheme. Or, your company might be
deducting your PF contribution, and the money is being embezzled, so
when the time comes to payout, you get nothing.

The difficulties faced by EPFO are well known. In recent years the top
management of the EPFO has been trying to address some of its
problems. The problems with the 2500 odd exempt funds which are known
to default on contributions and have difficulties in paying the high
interest rates that match the EPF rate are also known. But almost
nothing is known about the 'excluded funds'. How many companies are
running their own provident fund schemes ? What schemes are they
offering? Do they have the ability to meet their obligations? Is the
money actually invested by the company where they claim it is? What
happens if the company goes bankrupt? What if the money is stolen?

Today the government knows nothing about number of such funds, the
size of their assets or the number of employees under these
schemes. Some guesswork suggests that assets in this sector could be
in the region of Rs.1,00,000 crore, or roughly half the size of the
Indian mutual fund industry. Every year companies get income tax
exemptions if they say that the PF investments they are making follow
the investment guidelines laid down by CBDT. But since this is done at
the level of regional income tax offices, there is no central database
that keeps this information in one place.

Worse, these PF schemes are completely unregulated. What sort of
benefits are they offering? Are the interests of the subscribers being
looked after? There is no way to check that there is no fraud or
malpractice in the running of the schemes. What if there is a default?
In the absence of a database and a regulator, there is no option for a
subscriber but to go to court in case he is cheated. And, it may be
decades before he gets justice.

There is clearly a good reason to remedy this situation. However, what
the Finance Bill 2006 has proposed is a giant step in the wrong
direction. It has proposed that unless an excluded fund is recognised
by the EPFO, it will not be recognised by the income tax
department. This means either some companies will not take tax breaks,
which is unlikely, or they will rush to get recognition by the EPFO.

It is difficult to believe that the Finance Minister is serious about
this proposal. EPFO is not a regulator: it simply lacks the capacity
to perform regulatory functions for excluded funds. After the public
differences between the high interest rates on EPF demanded by trade
unions and the Finance Minister who has, correctly, been unwilling to
give a subsidy to the EPFO, it is odd to see this leap of faith in the

While it is not entirely clear from the wording of the Finance Bill
that it seeks to equate the status of the excluded PFs which will be
'recognised' by the EPFO to that of the presently 'exempt' funds, if
it does, then it implies three things. First, the EPFO will have to
regulate all these funds which it does not have the capacity, and we
even don't know how many funds there are. Second, these funds will
have to pay interest rates that match the politically decided EPF
interest rate which could well push them into bankruptcy. And third,
that if a company defaults, the PF payment will be a headache of the
EPFO. Since no one knows how large is the size of the problem, this
could open up a can of worms bigger than the EPFO can handle. EPFO has
probably not been consulted before putting this administrative and
financial burden upon it! With a deficit of Rs.22,000 crores in its
pension scheme (EPS) and with barely 25 percent of its accounts in
proper shape, the Finance Minister ought to have serious doubts about
the EPFO's capacity to handle the implications of the proposal in the
Finance Bill.

On the other hand, this could be an omission in the Finance Bill and
would get corrected before the bill is passed. The best way to go
ahead might be first merely to ask the companies running exempt funds
to register with the Ministry of Finance. They should be asked to
provide basic information about the number of employees covered, size
of assets and the nature of scheme before being eligible for income
tax deductions. This will give the government a sense of the scale of
the problem. Next comes the question of how to regulate these
schemes. This question can be tackled by PFRDA. However, at this stage
even a registration will be a big step ahead and provide valuable
information before a policy decision is made. If the FM does not
correct this omission it may prove to be a very costly one for the



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