EPFO to appoint separate custodian of securities

The Employees Provident Fund Organisation (EPFO) is set to appoint a separate custodian for the securities purchased by the fund managers.

“It is felt there should be an arm’s-length distance between the fund manager and the custodian of securities. There should be separation between fund manager, banker and the custodian,” a senior labour ministry official told Business Standard. “It is more prudent to appoint a custodian directly by EPFO who is different from the banker and fund managers.”

The expected expenditure to meet the professional fee to be paid to the custodian would be around Rs 1 crore per year. The proposal is expected to be approved by the Central Board of Trustees (CBT) of the EPFO in its next meeting the coming Friday.

The move is part of EPFO plans to streamline the process of managing its money (it has 47.2 million subscribers) by appointing a number of fund managers to ensure better returns. At present, securities purchased by the fund managers are kept with a custodian of securities appointed by the former themselves.

Background
State Bank of India (SBI) was the only fund manager till September 17, 2008. The securities purchased by SBI in the name of the organisation or the securities transferred to EPFO from the exempted trusts were kept by the custodian unit of SBI. There was no fee separately charged by SBI for the custodial services.

Since September 17, 2008, three more fund managers were appointed to manage the funds of EPFO till March 31, 2011 — ICICI Pru, HSBC AMC and Reliance Capital. SBI continued to keep the securities purchased by them with their custodian unit and the other three fund managers appointed HDFC Bank as custodian for the securities purchased by them.

Necessary accounts were opened in the HDFC Bank to facilitate purchase of securities and their maintenance, with the fund managers having power of attorney to operate the accounts on behalf of EPFO. The required reporting was done by the fund managers and HDFC Bank in coordination. The fee to HDFC Bank for the custodial services was paid by the fund managers.

After the expiry of the term of these fund managers on March 31 this year, it was decided by the CBT to ask SBI to manage the entire fund of EPFO till the appointment of new fund managers before June 30.

EPFO is in the process of appointing multiple fund managers for a three-year period beginning July 1 for managing its Rs 3 lakh crore corpus but the deadline is set to be extended further. The four fund managers handling the job till March 31 are among the 11 asset management companies (AMCs) in the race.

The seven new companies interested in managing EPFO funds include Kotak Securities, Securities Trading Corporation of India, UTI Securities and ICICI Securities. The timeline for selection of new fund managers is now likely to be extended by another two months, to August 31, in the CBT meeting this Friday.