The Telegraph
Since 1st March, 1999
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Ministries lock horns over PF investments

Calcutta, June 12: The Union labour ministry bars company-managed provident funds — or exempted trusts — from investing in gilt mutual funds even though the ministry of finance considers such investments as perfectly legitimate.

In fact, the Employees’ Provident Fund Organisation — which falls under the jurisdiction of the Union labour ministry — has begun hauling up companies for investing PF contributions in gilt mutual funds.

Provident funds are allowed to invest up to 60 per cent of their corpus in state and central government securities. The notification issued by the Union finance ministry says the exempted trusts could route these investments through mutual funds.

Relying on the finance ministry notification, which was subsequently endorsed by a notification issued by the income tax department, a number of companies had invested a part of their PF corpus in gilt mutual funds to gain a diversified exposure in government securities.

Following the government’s decision to keep the interest rate on PF unchanged at 9.5 per cent for 2003-04, companies that had invested in mutual funds have started booking capital gains. Most of them say they would manage to pay 9.5 per cent thanks to the capital gains.

In fact, a large Calcutta-based company says it is likely to continue paying 9.5 per cent on its employees’ provident fund corpus on monthly compounding basis, which takes the annualised return to over 10 per cent, largely out of its profits from mutual fund investments. However, the provident fund authorities might still haul them up.

Those companies that would not manage to pay 9.5 per cent would have to surrender their ‘exempted’ status and give up their corpus to the Employees Provident Fund Organisation.

Observers say a large number of companies might be forced to surrender their corpus, which would result in the government having to pay a larger subsidy than it had anticipated.

Amnesty scheme

A senior official in Employees’ Provident Fund Organisation said the government was considering an amnesty scheme for PF defaulters.

Under the scheme, companies that have defaulted on provident fund contributions would get some remissions for clearing their dues, he said.

“If a defaulter pays the principal and the interest, the penalty would be waived,” he explained. The central board of trustees of the organisation had cleared the proposal, he added.

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