The finance ministry wants the Employees' Provident Fund Organisation to bypass the central board of trustees when deciding how to invest a portion of the Rs 5-lakh crore (Rs 5 trillion) provident fund corpus in the capital market.

The issue will be discussed at a crucial CBT meeting slated for February 15 on implementing its decision to give 9.5 per cent interest for 2010-2011.

"It is felt that (the) government need not take recourse to the argument that the matter needs to be discussed by CBT, EPF. This policy is not always followed by the ministry of labour," wrote economic affairs secretary R Gopalan to the labour ministry on December 10, 2010, when he was secretary in the department of financial services.

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In his letter, Gopalan pointed out that the labour ministry had brought about drastic changes to the benefit structure of the pension scheme in 1995 and 2008 without discussion by the CBT, as they were deemed necessary to ensure the financial viability of the scheme.

"The ministry of labour may take a similar view on the issue of investment pattern, keeping in mind the welfare of the organised sector and especially of the 'exempt' funds, as following the old investment pattern of the ministry of labour results in negative real returns vis-a-vis positive returns earned while using the investment pattern of the ministry of finance," Gopalan stated.

The finance ministry has also rejected the EPFO's demand for a government guarantee for provident fund investments in the capital market.

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Gopalan categorically stated that "there is no question of government providing a sovereign guarantee to any provident fund, as this will create perverse incentives and moral hazards on the part of the trustees in exercising due diligence while exercising judgement on investment choices".

D L Sachdev, secretary of the All-India Trade Union Congress and a member of the CBT, told Business Standard that the stand of the finance ministry on investing provident fund money in the capital markets was contradictory.

"On the one hand, it is stressed that the trustees must take informed and prudent decisions in the interests of the trust. On the other hand, EPFO is being directed to make investments in the capital market bypassing the trustees," said Sachdev.

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He added that the finance ministry wanted EPFO to invest 15 per cent of its corpus in the capital market, but was not prepared to give a guarantee.

"If returns are less than 9.5 per cent on the money invested in the capital market from the corpus, the balance should be provided by the government," said Sachdev.

The finance ministry is yet to approve a 9.5 per cent interest rate for the current financial year.