Nearly seven years after starting to deploy a part of its corpus in the stock market through professional fund managers, the Employees’ Provident Fund Organisation (EPFO) has now decided to appoint an independent auditor to keep an eye on their investment transactions and report any deviations.
An official said the decision to appoint an external concurrent auditor who could “scrutinise day-to-day transactions by the portfolio managers” was taken prior to the current volatility in the stock markets, and was aimed at ensuring that the investment pattern and norms specified for EPF savings were followed strictly.
In 2020-21, the fund managers invested nearly ₹1.82 lakh crore, which includes equity investments of at least 5% of the incremental EPF inflows into members’ accounts. The EPFO had begun equity investments in 2015-16, with a ceiling of 15% of fresh inflows. A minimum of 45% and a maximum of 65% of inflows are invested in government securities.
Entrusted with retirement savings of formal sector employees worth over ₹15.7 lakh crore, the EPFO has been using multiple portfolio managers to manage its investments since 2008.
It currently relies on UTI Asset Management Company and SBI Mutual Fund to allocate members’ monthly contributions into different securities.
“Based on a decision of the EPFO’s Central Board of Trustees chaired by Union Labour and Employment Minister Bhupender Yadav, we are in the process of selecting an external concurrent auditor to verify the portfolio managers’ compliance with our terms of agreement,” the official said.
Apart from procedural lapses and challenges in the investment process, the auditor would be tasked with undertaking a detailed analysis of instances of downgrades and defaults in EPFO’s holdings each quarter. Credit ratings of securities would, however, be reviewed on a daily basis with any downgrades or ‘negative outlook’ reports flagged immediately to the PF body.
“In fact, any exceptions or deviations would have to be reported to us immediately. The auditor will not only have to verify daily transaction details to assess whether the fund managers are investing EPF money promptly, but also to assess if the investments that are made offer the highest available yield at the time and have been carried out on an ‘optimal market rate’. We also want to know if each investment decision is backed by a rationale,” the official explained.
If EPF funds remain uninvested for a significant period, for instance, the auditor shall assess the ‘opportunity cost due to delayed investments’, and keep an eye out for any potential conflict of interest in fund managers’ decision-making processes. While the EPFO reviews its portfolio managers’ performance periodically, the auditor would be required to check if issues highlighted in previous reviews have been addressed.
Better returns
At a broader level, the EPFO also expects the auditor to opine on regulatory and procedural bottlenecks in the investment process as well as keep it abreast of emerging policy issues in India and around the world that may help provide better returns and identify risks for its large investment corpus.
The PF office hopes to conclude the auditor’s appointment in this financial year itself. Along with a monthly audit report, the auditor would submit an annual report certifying investment holdings after a physical verification, and could be asked to undertake other ad hoc audits.
As of March 31, 2020, the EPFO has 24.77 crore members with EPF accounts, with 14.36 crore members allotted Unique Account Numbers. About five crore of these members had active contributions in their EPF accounts during 2019-20.
As per the proposed terms of engagement, the EPFO will be able to verify the audit records through another external agency if it feels the need.
