New Delhi, Feb. 21: Prodded by the finance ministry, the employees' provident fund has taken the first tentative step to explore the option of investing in the stock market.
Trustees of the central board of provident fund, which has 40 million subscribers, today appointed Mercer, an international consultancy, to recommend measures to improve the returns on the fund's investments.
'We have appointed Mercer to suggest improvement in the patterns of investments,' labour minister K. Chandrasekhar Rao said after a meeting of the trustees.
The decision comes in the wake of the finance ministry announcing an increase in the interest rate on deposits in the fund to 9.5 per cent, as demanded by the Left and trade unions. It, however, did not raise the 8 per cent interest that is paid under the government's special deposit scheme where the fund invests 80 per cent of its money.
As a result, the fund will end up with an annual deficit of Rs 927 crore ' the sum that represents the gap between the return on its investments and what it would have to pay subscribers.
Rao boasted: 'The government will manage to pay the money. It is better people stop worrying about it.'
In order for it to make up the deficit, the ministry also allowed the fund to invest 5 per cent of its money in equities and another 10 per cent in corporate debt and equity-related mutual funds. All non-government pension and provident funds were given this facility.
Critics would call it coercion, but the two steps together ' raising the interest rate and permitting investment in equity ' were a clear push to the country's largest provident fund to go to the market and stop being a drain on the exchequer.
The trade unions have opposed stock market investments because they think these are too risky and have been at loggerheads with the finance ministry on how to find the extra money to bridge the Rs 927-crore gap.
At today's meeting, too, they opposed the appointment of Mercer, the consulting business of Marsh & McLellan Companies with revenues of $11 billion and presence in some 40 countries.
It appeared, however, that their objection was to Mercer and not to the appointment of a consultant. Citu leader W.R. Wardharajan said all central trade unions, except the Congress-affiliated Intuc, opposed the appointment of Mercer, alleging that the consultancy's international business was embroiled in a scam.
Their objection was overruled.
Wardharajan also alleged that the conditions of the tender, which Mercer grabbed beating Deloitte Touche Tohmatsu and Watson Wyatt, were relaxed after the bidding had already opened.
The labour minister said Mercer would submit a report, expected within four months, based on which the fund's trustees would decide on restructuring the investment pattern.
Mercer's appointment, for a Rs 34-lakh fee, gives the trustees some breathing time before making the decision that has consequences for 40 million people and their families. The consultancy firm is expected to talk to the finance ministry before coming up with its suggestions.
Mercer's retirement benefits consulting practice is headed by Jagdeesh Salunkhe, a former chairman of the Life Insurance Corporation.