EPFO AMCs – WHAT LIES BENEATH ?

Today inflation is at 11.89% and currently, there is no fixed term deposit, Post Office savings scheme or even the Public Provident Fund which gives a return which would help keep one’s head above the water. It’s become a case of aamdani athanni, kharcha rupaya! What is even more frustrating is that there is a legitimate way in which, by prudently investing the crores of rupees which currently lies in the provident funds, one can beat inflation and give a much better return. Fortunately, this idea which was germinated by the Finance Minister in his Budget Speech of 2006-07 is finally given the go ahead.



In a landmark decision, yesterday’s another big news, which got lost in all the mayhem created by the credit policy, was that of the Employees Provident Fund Organisation (EPFO) selecting three private fund managers, along with India's largest commercial bank, to manage its corpus of Rs.240,000 crore. The organisation's trustees selected the asset management companies (AMC) of HSBC, ICICI Prudential and Reliance Capital, along with that of the State Bank of India -, to manage the fund that has 44 million members.



It is not yet known what would be the percentage of the Rs.2.4 lakh corpus which each AMC would get, that will now be decided by the trustees of EPFO. HSBC being the lowest bidder might actually get allocated a larger percentage of the corpus. So allocation of the corpus would be indirectly proportional to the fees charged.



The four AMCs will also render custodial services to maintain the previous investments currently held by SBI. The funds will continue to be managed as per the existing norms, which allows up to 5% equity investment. At present, EPFO does not invest in stocks. There is a proposal to allow the fund to invest up to 10% in equity, which has so far been resisted by trade union representatives on Board. Around Rs.30,000 crore will be available as incremental accretion to these fund managers each year. Crisil will monitor the performance of the new fund managers and will begin operations from September 1, 2008.


EPFO pays an annual service fee of Rs.5 crore to SBI and now that the four AMCs are going to pay a percentage as fees, the EPFO could have a savings of Rs.2 crore. So it’s a win-win for EPFO all along!



Now there is one interesting thing which happened during the shortlisting of the bidders. The original plan was to have just three bidders and according to the lowest bidders, being HSBC, ICICI Prudential and SBI were selected. Reliance Capital, however, was not among the managers shortlisted, its bid was rejected on technical grounds. However, the Board of Trustees amended some rules to accommodate the fourth AMC and that is how Reliance managed to put its feet in before the door snapped shut. Talk about having the right clout in the right places!



Infact the Left trade union representatives have gone on record stating that the inclusion of Reliance was politically motivated, more to accommodate the new found partners of UPA – the Samajwadi Party. The decision to have four instead of three AMCs is good, as it spreads the risks and increases the earning potential. But what came as a surprise was that only one name was suggested for the fourth AMC and that was of Reliance. How come it got accepted despite having earlier got rejected on “technical” grounds?



HSBC had quoted a fee of 0.0063%, ICICI Prudential quoted 0.0075%, SBI 0.01% and Reliance Capital also at 0.01%. HDFC AMC and Birla Sun Life AMC were also shortlisted but were later rejected as they had made a bid at zero percent. And the Trustees said that zero percent did not constitute a valid contract and were hence rejected. It’s a pity that in their eagerness to win the prestigious bid, they were ready to take on the asset management of the largest corpus in India for free. The trustees felt that these AMCs by quoting a zero percent were trying to cash-in on the prestige of being associated with managing funds of EPFO. But then under the same logic, wasn’t Reliance also accommodated despite the shortcomings, isn’t that a major compromise?



Politics has permeated into all facets of our lives. Managing terrorism has become a political issue, need we say more? So in that context, call it politically motivated or sheer clout, the fact that EPFO has now taken this bold step ahead is in itself a major victory. Fine, some rules were amended to accommodate Reliance but at least rules were amended for the good! Like most pragmatic Indians, its best to accept that some things do happen underneath but so what, when the end result is positive? The performance and returns will show whether this was worth it or not.