When the labour ministry announced the appointment of four fund managers to replace State Bank of India?s monopoly over the Rs 240,000 crore Employees? Provident Fund Organisation (EPFO) on July 29, not only did it brush aside the strong dissent expressed by trade union representatives on the EPFO Board, but also several concerns raised by the finance ministry about the fund managers? selection process and the potential legal consequences that could arise. Even as board members have protested the draft minutes of the July 29 meeting, the labour ministry has once again ignored the North Block?s explicit concerns that the allocation of funds to the new managers could become a case for ?legal action.?

As per the draft minutes of the board meeting available with FE, the original plan (as confirmed by ministry officials at the time) to let the EPFO Board?s Finance and Investment Committee arrive at the allocation formula for the funds to be divided among the four managers has been junked. The amount to be allocated to State Bank of India, HSBC AMC, ICICI Prudential AMC and Reliance Capital AMC ? would now be decided ?with the approval of the chairman? of the Board, minister of state for labour and employment Oscar Fernandes. The finance ministry representative had advised the Board to avoid an allocation formula ?whose basis can be argued.?

The finance ministry had pointed out at the 29 July Board meeting that the allocation formula should have been fixed and informed to the bidders ?at the initial stage? as the basis of allocation ?can be argued at post bid stage and it may become a case for legal action?. The finance ministry had referred to the ?very painstaking and a detailed exercise? it had employed to pick multiple fund managers for government employees? New Pension Scheme under the Pension Fund Development and Regulatory Authority (PFRDA).

Board members, already upset at the selection process and the surprise late-entry of Reliance into the list of managers, are furious at this change of stance, reflected in the draft minutes of the meeting and havetaken a strong exception to the way the minutes have been ?doctored? to align with the last-minute decision to add Reliance Capital to the list of three fund managers submitted by the FIC.

The last line of the draft minutes state: ?It was also decided that the proportion for allocation of funds among the fund managers would be decided with the approval of the chairman, CBT, EPF.? Board members say there was no decision to this effect. In fact, while briefing the press after the meeting, labour ministry officials had said that a meeting of the FIC would be convened soon to arrive at the allocation formula.

Speaking to FE, EPFO Board member and Citu secretary W R Varadarajan said, ?I take strong exception to the decision recorded in the draft minutes that ?the proportion for allocation of funds among the fund managers would be decided with the approval of the chairman, CBT, EPF?. In my view this should be decided only by the CBT, on the recommendation of the FIC, taking into account the extant practice obtaining in the Central Government, as indicated during the meeting of the CBT.?

Citu and other trade unions have called a nationwide strike on Wednesday to protest against the UPA government?s policies and the appointment of private fund managers is one of their key planks for the stir.

Incidentally, the finance ministry?s concerns weren?t limited to the mechanism for allocating funds, but also key elements of the bidding process used to short list fund managers.

With regard to the disqualification of Birla Sun Life AMC and HDFC AMC for their ?zero? financial bids, the finance ministry?s representative on the board, joint secretary K P Krishnan, had observed that ?there should be no ambiguity in the original documents that the entities have been prohibited to quote zero cost.? Otherwise, the post-bid elimination of such AMCs may fall on legal grounds, the Board was warned. A senior official involved in the process admits that the initial bid documents didn?t include any such clause ruling out zero bids.

As far as the allocation of funds to the three managers (the fourth manager Reliance Capital wasn?t in the picture at this juncture of the meeting) was concerned, one idea under consideration was to split the three schemes operated by the EPFO among them. Apart from the Employees? Provident Fund, the EPFO runs the Employees? Pension Scheme (EPS) 1995 and an Employees? Deposit Linked Insurance (EDLI) scheme and it was mooted that the lowest bidder can get the largest corpus (of EPF), the second lowest bidder would get the EPS money leaving the third manager with the EDLI corpus.

The finance ministry had warned that different schemes having different costs could create accounting problems at a later stage. ?The quantum of funds allocated did not matter but there is a likelihood that due to this pattern of allocation, there may be a higher cost on EPS,? the ministry official said, adding that the basis of allocation should have been made clear at the outset else it could become ?a case for legal action.?

A Gujarat government official had also stressed that the rate of fee charged by L-2 and L-3 AMC should be same as that of L-1 ?otherwise it will become an audit objection.?

It may be recalled that when the PFRDA appointed 3 fund managers ? UTI, LIC and SBI ? for the New Pension scheme, it apportioned funds on the basis of their original cost bids. But LIC , whose fee bid was 12 times that of SBI?s 0.05%, was asked to match SBI?s costs. UTI had bid 0.03% of funds as its cost.