Disclaimer: This is not a well researched post. It is just something that wandered across my consciousness the other day.
If you had anything to do with the financial markets till date, you would have definitely heard of the sub-prime crisis and its fall out on the financial markets over the last few months. What struck me was the fact that low grade mortgages were broken up and put with other securities to get AAA+ rated financial instruments.
And if you are not into financial markets but wish to be wealthy I am sure you would have heard of one or the other MLM (Multi – Level – Marketing) schemes. MLM schemes like Amway, Goldquest, etc are commission based schemes, were the person higher up in the chain gets a part of the cash that the person joining the chain pays. While there are many posts arguing for and against MLM’s (example ) I couldn’t help but wonder about the biggest MLM of them all.
Which one? The Employee Provident Fund Organisation (EPFO) in India. Why? Well let us see,
The people joining the workforce are always more than the people leaving the workforce. The government rules make sure that this will always be the case. Consider the fact that the latest rule is that a company as small as 10 people should have contributions to a provident fund.
The contributions to EPFO or PPF (Public Provident Fund) are part of an EEE regime. (Exempt from Income tax on Deposit, Interest and Withdrawal). The tax implications make a lot of people deposit their cash with the provident fund. Not to mention that the history of the rate of interest being offered was so high that people kept investing.
If we look at withdrawal part there are very few conditions where an individual can withdraw this money before his retirement which is usually after a period of 30 – 40 years. During this entire time the corpus is just growing. Now there is talk of changing the structure to EET, where in the amounts are not added to income tax on deposit and interest accrued. But they will be subjected to tax upon withdrawal. If such an amendment comes into effect, the withdrawals from the corpus will decrease even further.
The corpus is just a figure on paper. I don’t think the money is actually held physically. So then it comes to the question of valuations. A piece of land, if held by the organization, can be valued differently by different people. There is no dearth of people who will manipulate numbers to make things look much rosier than they actually are. This is what happened during the sub-prime crisis.
So in effect, I have money coming into the organization and restrictions on its withdrawal. The numbers mentioned in reports are just figures which may or may not be completely backed by assets. The only way we could ever know how sound financial institutions are, is when there is a run on the deposits. With the Government of India standing guarantor the chances of people making a run on the EPFO are minimal.
But this is seems to be a logical contradiction. Ask any person with some amount of experience in dealing with bureaucrats and he will say the babus are not to be trusted. Is that money still there? Or has the money been used by the board to buy some property that couldn’t be sold on the open market? Made investments at questionable levels?
As you probably have realized, there are too many ideas about it running through my head. It hasn’t been organized very well, but maybe I’ll get around to rewriting this piece some other time. Till then, comments about where I am right or wrong would help me organize my arguments better. So keep those comments coming.
Note to self: Keep posting regularly otherwise the organisation and quality of posts are going to go for a toss.