The government has announced plans to double the investment limit of Employees Provident Fund deposits in the stock market, less than six months after central trade unions had bitterly opposed such a move.
The Ministry of Labour and Employment said on Thursday it would be investing 10% of total accretions in equities, or exchange-traded funds, in 2016-’17. This is double the quantum from last year when the ministry had, for the first time, invested 5% of total deposits, or Rs 6.5 lakh crores, in the equity markets.
Central trade union leaders, several of whom are members of the Central Board of Trustees of the Employees Provident Fund Organisation, oppose investing workers' savings in equity markets because of the risks involved. They have pointed out that the Employees Provident Fund has been stable and growing, earning a rate of return of 8.8% to 9% without investments in volatile financial markets.
The Employees Provident Fund works as a savings instrument where a percentage of a worker's salary is put into a fund. Workers contribute 12% of their basic salary towards the fund and employers match that amount. The total amount is handed over to the Employees Provident Fund Organisation which invests the pooled money, generating interest and building a corpus for the workers.
The Employees Provident Fund has 37 million subscribers, and a corpus this year of Rs 8 lakh crores. According to ministry data, Rs 1.3 lakh crores was added to the corpus this year.
Ministry officials now plan to invest 10% of this, or Rs 13,000 crores, in the equity markets, up from Rs 6,577 crore in 2015-’16.
The decision to increase the investment limit from 5% to 10% was taken “without the approval of the Central Board of Trustees”, the ministry said in a statement on Thursday.
Shankar Agarwal, secretary in the ministry, told Scroll.in that the board failed to agree on the decision. “The board was consulted twice but there was no consensus at the meetings,” he said.
The secretary added, “The government has taken this decision in the interest of workers as the rates of return from equity markets on the investments was around 13% till August 2015, much higher than investments made in debt instruments.”
But members of the Central Board of Trustees criticised the government for taking what they claimed was a “unilateral decision”.
“This government has let go of even the semblance of consultation now,” said AK Padmanabhan, board member and president of the Centre of Indian Trade Unions, which is affiliated to the Communist Party of India (Marxist).
“Such investments could lead to total loss of workers' savings,” he said. “Just today, we saw the stock markets crash over 500 points. The government argues that in the long term such investments will be beneficial, but workers' hard-earned savings should not be invested where there is no guarantee of returns.”
The rules on the pattern of investment of the Employees Provident Fund permit between 5% and 15% of equity investment. But the board had opposed even 5% investment in equities last year.
The other flashpoint
Earlier, in March, central trade unions affiliated to various political parties had opposed government proposals in the Union budget to increase taxation on withdrawals from the Employees Provident Fund and to increase investment of deposits in equity markets.
The following month, thousands of women workers of garment factories in Bengaluru went on a two-day strike, forcing the Central government to alter its proposal to increase the tax on provident fund withdrawals.
Thursday’s announcement comes at a time when the government and the central trade unions are already on a collision course over the former's recent decision to cut down its stake in 22 public sector companies to less than 51% as part of its disinvestment drive.