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Managing EPF money without fee is no charity

Two-day float gives fund houses room to earn enough by parking it in the overnight market, reports Sandeep Singh.

business Updated: Aug 15, 2008 20:52 IST
Sandeep Singh

When the Employees’ Provident Fund Organisation picked private fund managers to handle the incremental accretion to its corpus, it disqualified two bidders — HDFC AMC and Birla Sunlife AMC —that offered to do the job for a zero fee.

The rationale was that without a fee, the EPFO could bind these companies to any strings or obligations. While the jury is still out on the merit of that argument, many are curious as to why those two companies offered to manage the funds without a fee.

Was it charity? Well, it is not.

The EPFO allows the fund houses to keep the money with them for up to two days before investing in any of the designated assets.

Given that the money is huge, currently annual accretions are estimated at Rs 30,000 crore, a two-day float gives the fund houses enough room to earn enough by parking it in the overnight market, said a senior government official, who did not wish to be named.

The call money rate currently hovers around 9.25 per cent per annum. If a fund manager has Rs 10,000 crore for two days and lends it in the call money market, he can make at least Rs 5 crore in interest earnings. That’s the reason why even the four companies that emerged as successful bidder for the EPFO money also offered fees, which are almost close to nil.

Among them HSBC AMC is charging 0.0063 per cent, while ICICI Prudential is charging 0.0075 per cent and both State Bank of India and Reliance Capital Asset Management would be charging 0.01 per cent. At the rate that HSBC AMC has quoted, the lowest among the successful bidders, it would be able to earn only Rs 63 lakh on a corpus of Rs 10,000 crore. With the same money, it can earn Rs 5 crore from the call money market, because of the float available for two days.

EPFO is now working towards final transfer of money to the fund houses. The management expects to transfer the backlog money by September 1 and will also transfer the incremental amount in the same month, said an EPFO official.

If the fund houses do not invest the money within the two days then they will be required to provide return equivalent to the bank’s savings interest rate and an additional four per cent return, said the official.