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How IL&FS' misadventures made India Inc poorer by Rs 9,000-crore

May 20, 2019 16:45 IST

Almost 2,000 companies whose private provident and pension funds have invested in non-convertible debentures of IL&FS group firms are staring at the prospect of booking losses to the tune of Rs 9,000 crore or more if the interest income is added.

Illustration: Uttam Ghosh/Rediff.com

After mutual funds (MFs) and insurance companies, India Inc is likely to be the next victim of defaults by the Infrastructure Leasing & Financial Services (IL&FS) group firms.

Almost 2,000 companies whose private provident and pension funds have invested in non-convertible debentures of IL&FS group firms are staring at the prospect of booking losses to the tune of Rs 9,000 crore or more if the interest income is added.

 

And, these companies will have to make good these losses, according to the guidelines of the Employees’ Provident Fund Scheme (EPFS), 1952.

The long list of companies includes marquee names like Infosys, Tata Power, and Lupin.

The list also includes many government companies such as Food Corporation of India, State Bank of India, Bharat Petroleum Corporation, and Indian Oil Corporation. It’s not just the private sector provident funds (PFs) which are facing this crunch.

Reports say that the finance ministry has recently sought details of the Employees’ Provident Fund Organisation’s (EPFO’s) exposure to IL&FS and similar risky entities, as it might stifle its ability to pay the declared rate of interest.

“The government, while granting exemption to private provident and pension fund schemes, has certain conditions.

"For one, the interest rate offered has to be necessarily equal, if not better, than the EPFO-declared rate.

“When an establishment obtains PF exemption, it undertakes to match, if not better, all the benefits that are provided by the EPFO.

"Not being able to match the EPFO-declared PF rate may lead to cancellation of the PF exemption,” said Anil Lobo, India business leader-retirement at Mercer.

According to Lobo, if there is any deficit due to a shortfall in earnings from investments or any loss due to bad investments or loss due to non-receipt of interest, the employer has to make good the loss to the extent incurred by the trust.

“Employers have the fiduciary responsibility to do so, as they have to keep up the promise they have made to the employees in writing while onboarding them,” adds Lobo.

Condition 6 laid out in Section 27AA of Chapter IV of the EPFS clearly states: “The employer shall bear all the expenses of the administration of the PF and also make good any other loss that may be caused to the PF due to theft, burglary, defalcation, misappropriation or any other reason.”

Similarly, Conditions 7 and 28 deal with loss in interest income and loss to trust.

What is essential is the investments of these funds are in IL&FS, IL&FS Financial Services (IFIN), IL&FS Transportation Networks (ITNL), and Hazaribagh Ranchi Expressway.

Out of this, IL&FS, IFIN, and ITNL are on the ‘red’ list - which means companies with no cash.

Those with enough to pay secured creditors, but not unsecured ones, have ‘amber’ classification.

And, those in a position to pay all creditors are ‘green’.

The National Company Law Appellate Tribunal has allowed ‘green’ firms to service debt obligations.

Industry sources say that companies run private PFs/trusts because it is a good investment avenue for them.

“While companies offer slightly higher interest rates than EPFO, they can make decent returns from their investments. Such large-scale defaults happen rarely,” said the head of an insurance firm.

MFs and insurance companies, with exposures of over Rs 12,000 crore, have had to write-off their investments.

Some fund houses have written off the amount entirely, while others have taken partial haircuts, till now.

The total debt of the group is over Rs 92,000 crore. These include banks, MFs, insurance companies, PFs, and other financial creditors.

Ready Reckoner

Key conditions in Employees’ Provident Fund Scheme, 1952, for private provident fund schemes/trusts

Condition 6 in Appendix to Paragraph 27AA of Chapter IV

The employer shall bear all the expenses of the administration of the PF and also make good any other loss that may be caused to the PF due to theft, burglary, defalcation, misappropriation or any other reason

Condition 7 in Appendix to Paragraph 27AA of Chapter IV

Any deficiency in the interest declared by the board of trustees is to be made good by the employer to bring it up to the statutory limit

Condition 28 in Appendix to Paragraph 27AA of Chapter IV

In the event of any loss to the trust as a result of any fraud, defalcation, wrong investment decisions, etc, the employer shall be liable to make good the loss

Joydeep Ghosh in New Delhi
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