Is finmin an Honest Broker when it comes to advising EPFO?
Should the EPFO, not the smartest of retirement fund custodians, be investing where the finance ministry tells it to?
By R Jagannathan
Would you advice your best fund to invest his retirement money in a loss-making airline? Even if the airline in question happens to be called Air India?
But this is what the government convinced the Employees Provident Fund Organisation (EPFO), every salaryperson's retirement fund manager, to do last year when Air India desperately needed money. The only comfort was that the government would guarantee the repayments. Having bailed out Air India using EPFO money (among others), the government is tempted to do so with other public sector bond issues, including MTNL.
Is it ethical for someone to advice you to buy a financial product if that someone has a vested interest in that sale?
But this is what the finance ministry has been telling the EPFO. According to The Economic Times, the Department of Disinvestment in the finance ministry has asked the EPFO to consider investing in exchange traded funds (ETFs) holding public sector shares.
The reasoning: once the ETF route is opened up, the EPFO would be able to buy a "basket of blue-chip public sector stocks," helping the fund diversify risks across sectors rather than in individual stocks. "Moreover", the report assures us, "the common theme of government ownership would be a source of comfort."
Source of comfort to whom is the question.
The finance ministry wants to sell public sector shares in a market that may be indifferent to public sector shares with a poor record of financial independence. This is why it arm-twisted the Life Insurance Corporation to buy "blue chip" shares such as ONGC in 2012. Even later disinvestments needed the LIC to bail out the share sales. Just this March, it happened with SAIL.
And now, it seems, EPFO is also being roped in to invest in ETFs - which themselves are a bailout mechanism in which public sector shares are first offloaded into an ETF, and then sold piecemeal.
This writer has always supported the idea of disinvestment, but not in the way the UPA has been trying to do - just to raise money, and with no changes in governance standards or ensuring public sector accountability to shareholders. ONGC, the oil marketing companies and Coal India Ltd are listed companies where commercial decisions are taken by government without concern for minority shareholders.
The EPFO should certainly be empowered to invest in equity - but through the professional fund management route where the universe to choose from is the entire stock market zoo and not just the public sector menagerie.
There are several governance issues involved in asking the EPFO to invest in losers like Air India and even the public sector ETFs.
First, Air India is supposed to be bailed out by the government. By shifting this bailout to EPFO, the government is trying to do two things: pretending that the loan liability is outside the government, even while taking on the guarantee.
If government has to bail out Air India, why not do so directly instead of using the EPFO as guinea pig with a guarantee?
Second, encouraging EPFO to invest in shares that the government wants to disinvest is halfway unethical - especially when the government has been busy ruining the profitability of so-called blue chips such as ONGC, Coal India and many others by forcing them to bear subsidies.
With the corpus of over Rs 5,00,000 crore, the EPFO should be investing in shares conservatively. But it should not be buying the government's hand-me-downs without an independent assessment of their underlying value.
The EPFO is not the savviest of investors at the best of times. The last thing it needs is nudges from the finance ministry on where to invest, especially when the ministry is not an honest broker in this exercise.