India Inc welcomes EPF rate cut

Exempted provident fund (PF) trusts of corporates such as the Tata group, Hindustan Lever and some infotech majors will breath easy following the one percentage point cut in interest rate on employee PF contribution to 8.5 per cent for 2005-06.

These corporations will not be required to chip in to bridge any shortfall between yields on investments and returns committed to employees.

Gilt prices rose by 7-8 paise in early trades today in response to the cut in EPF rate. Profit booking, however, dampened market sentiment. The market continued to look rangebound amid ample liquidity as the cut was anticipated, a dealer with debt broking firm said.

There are 2,000 exempted trusts which manage funds for employees of corporates, organisations and state-owned enterprises.

Their corpus is about Rs 30,000 crore. While the yield on investment of this corpus is between 7.5 per cent and 8.5 per cent, the trusts were to give 9.5 per cent return to employees had there not been any downward revision of the EPF rate.

Many trusts have old investments in gilts which provide yields of about 9 per cent. But in the falling interest rate regime, it was a tough task to offer high returns on employee contribution.

"Had there been no rate cut, corporations would have to shell out funds as trust reserves might have turned dry," said Dharmesh Ojha, joint (fixed income) Brics Securities.

The rate cut brings returns on PF in line with market trends. The yield on investments by Employee Provident Fund Organisation's central board of trustees is around 8.25-8.30 per cent.

At 8.5 per cent, the EPFO faces a shortfall of around Rs 370 crore during the year as its income is estimated at Rs 6,523 crore, while liability is pegged at Rs 6,889.04 crore.

The EPFO's finance and investment committee had recommended an 8 per cent interest rate, which would have left a surplus of Rs 39.35 crore. 

EPFO INVESTMENTS
Provident Fund (Rs. in Crore)	2000-01	2001-02	2002-03
Exempted	2714.74	2547.25	529.17
Un-exempted	6698.53	5583.78	5425.29
Total	9413.27	8131.03	5954.46
Family Pension Fund/Pension Fund  (Securities + Public Account)	5806.26	5833.42	5995.46
Deposit Linked Insurance Fund  (Securities + Public Account)	317.08	341.84	360.42