PFs may not get to invest in parent firms

The government is likely to restrict provident fund (PF) trusts from investing in their parent companies.

The idea is to prevent an Enron-style scam, wherein not only did thousands of employees lose their jobs when the company declared bankruptcy, but they also lost about $1 billion as their retirement savings were invested in the company's stock.

In a major revamp of the investment norms for provident, superannuation and gratuity funds, for the first time, the finance ministry on Friday enabled the funds to invest 5 per cent incremental capital in the equity market.

The government is understood to be revisiting the issue and is expected to clarify investment issues.

Global firms such as Enron, Adelphia, Global Crossing, WorldCom, IMClone and a host of others have been accused of manipulating their scrips and misleading their own employees to invest.

Because of this, Indian PF trustees feel there is a need to be more cautious.

"In total, the 5 per cent investment in equity is not such a large sum when one considers that post-payouts, the incremental accretion would be about a few hundred crore rupees. However, should something go wrong, then there could be a negative impact on individual company's retirement schemes," said senior executives close to the development.

"A provident fund trust is a creation of the employer and should not, therefore, be allowed to invest in the employer's stock. There is always the likelihood of companies misusing the funds to inflate the share price," added government sources.

Many countries such as the UK have imposed a restriction on employers investing in retirement savings.

PF trustees themselves are equally sceptical about the new norm, fearing the safety of retirement funds. Many fear that the government proposal is only a means of giving a boost to the stock market at the expense of retirement savings.

It might be recalled that while Enron executives quietly sold their holdings in the company prior to its collapse, they imposed a freeze on employee transactions involving Enron stock in the 401K (retirement savings) plan.

According to testimony by some Enron executives, even as the management knew the company was going under, senior company officials continued to advise employees to invest in Enron stock. PF trusts added that there has to be some provision wherein trustees can exit from a scrip should they feel the company is going down.

"By stating that PFs can exit (a stock) only when the company's credit rating goes below investment grade, will be the wrong time to sell," said a PF trustee.

Senior government official however told Business Standard, that PFs will be allowed to trade their equity portfolio. "As such trusts can buy and sell their equity portfolio," he added.