People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 33

August 24 , 2008



Draining Of EPF Funds To Favour Corporates

W R Varada Rajan

AFTER the dubious ‘win’ the Manmohan Singh government ‘managed’ to achieve during the trust vote in parliament, the UPA regime has been boasting of expediting the hitherto held back corporate/MNCs friendly ‘reform-agenda’. The labour minister flagged off this process with the ‘decision’ to hand over the hard earned social security savings of the workers – under the different schemes of the Employees’ Provident Fund (EPF) – to three private sector Asset Management Companies (AMCs), designated as ‘Fund Managers’. This had been announced by the labour minister as the ‘majority decision’ at a truncated meeting of the Central Board of Trustees (CBT) held on July 29, 2008.

The EPF Organisation administers three schemes viz 1) Employees’ Provident Fund; 2) Employees’ Pension Scheme and 3) Employees’ Deposit Linked Insurance Scheme for which contributions from workers/managements are mandatory. The corpus under the three schemes is around Rs 2,60,000 crore and the annual turnover, comprising fresh accrual of contributions and maturity proceeds of earlier investments, exceeds Rs 30,000 crore.

So far, the State Bank of India (SBI) has been the sole Fund Manager entrusted with the deposit and investment of EPF funds. True, the CBT had accepted in principle the idea of introducing competition in fund management, with a view to explore avenues for maximising yield on investment of the EPF funds. But, the issue of engaging AMCs – which are nothing but entities operating in shares and securities market with the licence from Securities Exchange Board of India (SEBI) – for the purpose was the farthest from the thinking of the CBT.

Para 52 of the EPF Scheme categorically provides as under:

All monies belonging to the fund shall be deposited in the Reserve Bank of India or the State Bank of India or in such other scheduled banks as may be approved by the central government from time to time or shall be invested, subject to such directions as the central government may from time to time give ...”.

The EPFO has sought clarification from the ministry of labour relating to the interpretation of this Para 52 on two specific issues:

  1. Whether deposit and investment can be separate activities or can be treated as one.

  2. Whether Asset Management Company/SEBI registered Portfolio Manager other than the RBI/SBI can make investment on behalf of EPFO while keeping the Deposit Account with a Scheduled Bank.

The Ministry of Labour had, as far back in December 2007, advised as under:

... with the previous approval of the central government, funds may be deposited in any other scheduled bank as well but such interpretation cannot be stretched to include Asset Management Companies and the funds cannot be invested/diverted to any other security other than those mentioned above...”.

The labour minister, whom is also the chairman of the CBT, EPF, constituted a three-member committee with officials from the EPFO/ministry to draw up a road map for introducing competition in fund management. This 3-member committee appointed CRISIL, a credit rating agency as its consultant. The CBT had given assent to this 3-member committee to proceed with the process of selection of the fund managers in assistance with the appointed consultant. But, there was an explicit stipulation that “the recommendations of the 3-member committee shall be placed before the Finance and Investment Committee (a sub-committee of the CBT) and the CBT for final selection of Fund Managers.” This meeting of the CBT was held on January 23, 2008 and thereafter the matter was brought before the CBT only on July 29, 2008.

The Finance and Investment Committee (FIC) also deliberated this issue at its meeting held on March 19, 2008. Thereafter, the CBT as well as all the sub-committees were reconstituted. The reconstituted FIC was also convened to meet only on July 24, 2008.


During this interregnum the 3-member committee called for Expression of Intent (EOI) on April 17, 2008, through an open advertisement in the media, to which 17 entities – all but one (SBI) not being bank – responded. After technical evaluation by the appointed consultant (CRISIL), the 3-member committee excluded seven of them and the Request for Proposal (RFP) was called for by June 6, 2008, preceded by a pre-bid conference with the shortlisted 10 entities. The financial bids received from them were again evaluated by CRISIL. Interestingly, two of the bidders had quoted zero bids – offering to serve as Fund Manager without charging any transaction fee. The 3-member committee again secured the opinion from the Legal Consultant of the EPFO to the effect that there could be no valid contract if there is no consideration and excluded these two entities – HDFC AMC and Birla Sun Life AMC – who had quoted a NIL financial bid. Incidentally, the financial bids were opened and the proposal was finalised on July 22, 2008, the day the infamous trust vote in Lok Sabha was ‘secured’. Hence, neither the FIC nor the CBT was privy to the whole process, until the agenda item was placed on 24th and 29th July, 2008.

Transgressing its mandate the 3-member committee unilaterally decided on the following matters, which should have been brought before the CBT for a mandate:

  1. The threshold limit (in terms of Assets Under Management – AUM) for prospective Fund Managers to participate in the bidding process. This was determined as Rs 10,000 crore of others’ funds, which clearly excluded the public sector banks other than the SBI from participating in the bidding process.

  2. The number of Fund Managers to be appointed. The number was fixed as three, which however was enlarged at the last moment to four, just to include the Anil Ambani’s Reliance Capital AMC.

  3. The allocation of the funds between the multiple fund managers.

The EPFO in post-haste called the meeting of the Finance and Investment Committee on July 24, 2008 and that of the CBT on July 28, 2008. The 3-member committee placed a proposal to appoint three Fund Managers in the order of preference as under:


  2. ICICI Prudential AMC

  3. State Bank of India

The HSBC AMC is a subsidiary of a foreign bank and the ICICI Prudential AMC is a subsidiary of a private scheduled bank in which FIIs are majority stakeholders. Hence, divergent views were expressed in the Finance and Investment Committee with the employers’ side going along with the government and the workers’ side opposing the proposal.


The meeting of the CBT, slated for July 28th was deferred by a day and held at 1 p.m. on July 29, 2008. This resulted in a very thin attendance at the meeting with only 4 of the 10 employers’ representatives, 2 out of 15 state government representatives and seven out of 10 employees’ representatives attending.

The employees’ side, barring the sole exception of one INTUC representative, opposed appointment of foreign owned private entities as Fund Managers. Instead, they suggested that public sector banks could be considered for appointment as additional fund managers. The plea was rejected outright saying the credibility of the EPFO would be at stake if the tendering process initiated by the 3-member committee were scrapped at this stage.

At the last stage, the labour minister brought in the fourth entity –Reliance Capital AMC – and announced as a majority decision the appointment of four Fund Managers for the EPFO and that allocation of funds among the four would be subsequently decided.


That the EPFO administration was keen on enlisting the AMCs as Fund Managers from the beginning is clear from what had been stated at the meeting of the FIC held as early as on April 11, 2007. To quote from the confirmed minutes of the meeting:

The CPFC suggested that we might have four to five Fund Managers managing equal size of funds. He further remarked that the word ‘deposit’ as appearing in Para 52 may not be the same as ‘investment’. He also said choosing Fund mangers from among the Scheduled banks only would pre-empt other eligible AMCs or fund mangers like LIC’. Only after this, the clarification sought from the ministry of labour emphatically stated that interpretation of Para 52 ‘cannot be stretched to include Asset Management Companies’.

After this the trade union point was reiterated at the meeting of the FIC on November 19, 2007 as recorded in the minutes as “Shri Varada Rajan invited the attention of the members on the letter of the ministry and said that the ministry treated the activities of deposits and investments as equivalent even though the CPFC and EPFO’s empanelled advocate considered both these activities as disjoint. He further said that the public holding in such AMCs was also not clear. He said that AMCs should not be considered in view of the ministry’s letter”.

Again a note of caution was sounded at the meeting of the FIC held on January 21, 2008, where the minutes read as under: “Shri Varada Rajan said that it seemed the work of portfolio management could be going beyond banks, like to AMCs”.

How then the AMCs came to be considered? “The issue (whether AMCs could be entrusted with the task of fund management) was referred to the CPFC, who clarified that AMCs could be considered for undertaking fund management activities.”

Thus, the UPA regime has chosen to drain the EPF funds to favour the MNCs and corporates, throwing all norms and propriety to winds. This must be resisted, in order that the social security funds of the workers are not deployed to favour the AMCs in their quest for easy profits through speculative share market operations.