| The 9.5% rate will put pressure on the exempted funds.
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| Faced with an additional burden of Rs 530 crore because of the recent hike in the employees provident fund interest rate, quite a few exempted funds managed by private trusts are likely to opt for the Employees Provident Fund Organisation (EPFO).
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| Exempted funds can be viable only if the government announces a policy on EPF interest rate under which the returns offered had a linkage with the returns on investments, said Nehal Kothari, who manages Hindustan Lever’s provident fund, one of the largest exempted funds in the country.
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| "The 9.5 per cent rate will put pressure on the exempted funds. If this continues, they will have to consider whether it is better to surrender the scheme," said Nageshwar Rao, managing director, IDBI Bank.
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| Kothari said funds, which came up in the last five years, would be affected more since their portfolio would not have high-yield long-term securities as the interest rates had declined in the recent past.
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| Rao disputed the point saying that even old funds would have invested heavily into the special deposit scheme (SDS) for which the interest rate had dropped to 8 per cent. "The other 25 per cent investment cannot compensate for the 8 per cent return offered under SDS," Rao added.
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| While the government or the EPFO have to provide for the additional fund requirement for larger payouts by non-exempted funds, corporates will have to chip in with additional capital to ensure that the trusts managing the exempted funds do not face a deficit.
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| The number of exempted funds has fallen over the years because of the EPFO deciding to take over these funds after defaults. But now, with the government announcing a 9.5 per cent interest rate on EPF, it may suit the exempted funds to become non-exempted.
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| Over the past few years, officials said, some small exempted funds managing a corpus of less than Rs 20 crore had opted to become a part of the EPFO.
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| The EPFO is now responsible for creating avenues to fund the deficit instead of the corporates having to fill the gap between interest earned and interest given from their pockets, said an official.
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| At the end of March 2004, of the 3,70,386 establishments covered by the EPFO, 2,491 were in the exempted trusts category having a corpus of about Rs 53,995 crore.
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| During 2003-04, there was a net decrease of 73 establishments in the exempted category mainly due to their exemptions being cancelled. At the end of March 2003, there were 2,564 exempted trusts.
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| An exempted fund is one which manages the investment of its corpus on its own under a broad pattern decided by the investment and finance committee of EPFO.
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| The corpus of a non-exempted fund is managed by EPFO directly in addition to managing contributions from employees whose employers have not formed trusts. |
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