One of the key sources of uneasiness that triggered the recent face-off between the banking regulator and Sahara group’s flagship finance company, Sahara India Financial Corporation Limited (SIFCL) was the hundreds of crore languishing in Sahara’s coffers as unclaimed deposits. These are funds where there is no account or trace of the original depositors.
India’s premier social security organisation, the Employees Provident Fund Organisation (EPFO), runs three schemes—a provident fund, a pension fund and an insurance scheme. Like SIFCL, it collects contributions from millions of workers except that EPFO contributions are mandatory for most industries. Like SIFCL, the EPFO has money lying in its accounts as unclaimed deposits: only the amount is much larger, running into thousands of crores.
In its June 16 order, the RBI lifted the blanket ban on SIFCL accepting deposits but set tough conditions. Apart from requiring SIFCL to ensure 100% compliance with the banking system’s ‘Know Your Client’ norms and submitting a comprehensive business plan by this August, RBI got SIFCL to promise a key governance reform during a personal hearing with SIFCL’s managing worker.
SIFCL has to reconstitute its board so that at least half of the directors are ‘independent’ in RBI’s view by July 16. While the para-banking firm would be scrambling to deliver on this promise, a few hundred kilometers from its Lucknow office, another freshly constituted board of directors meets for the first time on Saturday—the EPFO’s Central Board of Trustees (CBT).
Going forward, at least half of SIFCL’s directors would be expected to know the meaning of the term ‘fiduciary responsibility.’ The same cannot be said about the ‘new’ CBT. Its 43 members include the labour minister as chairman, 15 state government representatives, ten employee union leaders, ten employer delegates and senior officials from labour and finance ministries.
To get a point across in such a large gathering is a task, especially when employee union leaders raise their political voice on matters like the annual setting of the PF rate. A matter of simple arithmetic till the late nineties, the PF rate—which is nothing more than a ‘dividend’ based on earnings—has become a victim of political pressure.
Little is likely to change in the short run—with inflation touching 11.63% and Left union leaders demanding a 12% PF rate for the year, compared to earnings of 8.25%. That there is little hope for governance reforms in the medium-term is obvious from the fact that there are hardly any new names in the re-formed Board, notified by the labour ministry.
In fact, for the first time in the 56-year history of EPFO, the ministry has notified the Board with some slots yet to be filled up. As many as four members are yet to be named—two employee representatives and two representatives from Indian manufacturers and small scale industries.
NDA’s last labour minister, the late Sahib Singh Verma, had refused to clear the Left unions’ representative’s name for a while the last time the Board was reconstructed in 2004, but had yielded before it was notified. It’s not clear yet what has prompted the UPA to notify the Board in such a hurry. The implication—when the several sub-committees are reconstituted on Saturday, four stakeholder reps wouldn’t be available for consideration.
That the Board is more akin to a ‘jumbo’ cabinet than a monitoring force or source of direction—even Board members acknowledge. For instance, the 15 state representatives, usually the labour secretaries, almost never speak in board meetings, even on issues that directly affect their jurisdictions—like 99% of their states’ workers’ accounts being inaccurate or 90% of employers defaulting on PF contributions (recently revealed to the Board’s executive committee).
In SIFCL’s case, RBI could step in as the regulator. But the EPFO, the country’s second largest non-banking financial institution after the LIC of India, goes unchecked as it is the administrator as well as regulator of the country’s retirement funds. It’s time the government had a serious rethink and professionalised the only entity overseeing the monolith’s operations—the CBT.