Nod for IDFC sets stage for 26% FDI in pension funds

Written by Bijay Shankar Patel | Rajat Guha | Rajat Guha | New Delhi | Updated: Jul 26 2011, 09:13am hrs
Contrary to a parliamentary panels proposal in 2005, the UPA-II government chose not to mention the FDI cap for Indian pension fund companies in the relevant Bill, but it has quietly gone ahead and allowed FDI in a domestic pension fund. The foreign investment promotion board (FIPB) has given Frances Societe Anonyme to pick up 25% stake in IDFC Pension Fund.

The decision not only sets a precedent, but will also reflect in the governments consolidated policy on foreign direct investment, where FDI limit in the pension sector will be prescribed at 26%, the same level as in insurance. It will also be stated in the policy that FDI proposals in the sector will have to go through FIPB.

With the concurrence of the finance ministry and the pension regulator PFRDA, the department of industrial policy and promotion, the nodal agency for FDI policy, will announce this change as it amends FDI policy in September, official sources told FE. Later, it will be notified under the Foreign Exchange Management Act. Investments by foreign institutional investments would be, however, not counted towards FDI calculation.

Obviously, the government reckons that it would be wise to keep FDI policy outside the ambit of the Pension Fund Regulatory and Development Authority (PFRDA) Bill. After an earlier version of the Bill lapsed following the dissolution of the 14th Lok Sabha, a new PFRDA Bill introduced in the current Lok Sabha is now being vetted by the parliamentary standing committee on finance. According to the Bill, foreign investment policy for pension sector intermediaries, including pension funds and the central record-keeping agency, would be determined and notified (through executive order) under the FEMA.

Societe Anonyme is a French pension fund. The FIPB recently okayed its proposal to hold 25% equity in IDFC Pension Fund through both direct and indirect routes.

FDI in pension sector has been unclear so far in the absence of any mention of it in the FDI policy. Even though the proposal to hike FDI limit in insurance from the current 26% to 49% is being debated upon on at the Parliamentary level, the government intends to go ahead and clear the air over FDI in pension sector. In the case of the insurance sector, since the 26% FDI cap is mentioned in the IRDA Act, any change would need Parliament's consent. In the 2004-05 budget speech, then finance minister P Chidambaram had proposed an increase in insurance FDI to 49%. But this has not been carried out as yet, owing to the rigorous process for getting Parliament nod for the insurance Bill. The government does not want to create a similar situation in the pension sector, where it wants a major expansion of coverage through a competitive, market-determined regime consisting of many pension fund managers.

According to a finance ministry official, the entry of foreign investment will be a boost for the pension sector, which has received lukewarm response from foreign investors so far. Currently, there are six fund managers for all citizens schemes IDFC Mutual Fund, Kotak Mahindra, SBI, UTI Asset Management, ICICI Prudential Life Insurance and Reliance MF. Over 23 lakh subscribers are registered with the New Pension System, which include around 8 lakh central government employees and just 50,000 subscribers from the unorganised sector.

In the Budget session this year, the government introduced the PFRDA Bill in the Lok Sabha to give statutory status to the interim pension regulator PFRDA. The government had constituted an interim pension sector regulator in 2003. The PFRDA Bill was earlier introduced in the Lok Sabha in 2005, which was then referred to the Standing Committee. The government proposed amendments in 2009 to give effect to certain recommendations of the Committee, but amendments could not be moved and the PFRDA Bill, 2005, could not be considered and passed, and the same lapsed due to the dissolution of the 14th Lok Sabha.

Though the PFRDA does not have statutory powers at present, it regulates NPS. The government had launched NPS for central government employees entering service from January 1, 2004. Later, it was extended to all citizens from May 1, 2009.