How exercising an Active Choice in NPS can impact India’s startup ecosystem
March 20, 2021 7:59 AM
Active Choice allows the individual and corporate contributors (Tier 1 contributors) to allocate up to 5% of our NPS investments to assets in Category A that represents ‘Alternative Investment Funds (AIFs)’
The total Assets Under Management (AUM) under Tier 1 as of February 26, 2021, amounted to a staggering Rs 42,822.73 crore
By Sunil K. Goyal
In the first four decades, post-Independence, job creation was led by the public sector and the government. Provident and pension funds, at that time, were channeling our investments to government securities as they were contributing to the growth of the economy. However, with innovation and entrepreneurship on the rise, economic growth is being led by startups.
As a venture capitalist who has nurtured startups in their early stage, I have witnessed both success and failure, excitement and despair, and, above all, reinvention. The hallmark of a founder who is most likely to succeed is his persistence and unwavering belief in his idea: the combination of these two qualities ensures that an individual is able to build an institution that doesn’t just reward investors but also has a ripple effect on society – one of these positive effects is employment generation.
At a time when India is faced with an unprecedented unemployment crisis against the backdrop of an economy recovering from the Covid-19 pandemic and rising inflation, even a single new job created will make a difference to a household. Hiring someone who lost his job because of the enforced lockdown can be a life-changing intervention not just for him but for his family. Consequently, it will alter their immediate local economy and, over time, help in the revival at a national level.
Whenever we receive a wedding invitation, it is quite natural to ask: “What do the boy and girl do?” These days, you are likely to hear names such as Flipkart, PayTM, Oyo, Ola, Zomato, Swiggy, Udaan, Delivery and so on. This clearly indicates that job creation – especially among the youth – is led by startups. This brings me to the point about the much-promoted National Pension Scheme (NPS).
Today, we investors in NPS are allowed to participate in the high growth startup sector by committing a portion of our investments: to do this, we have to make what is called an ‘Active Choice’.
However, the problem is that the general perception towards the NPS is that of a mere tax-saving instrument: we can make a tax-free contribution of Rs. 50,000 a year or contribute 10% of our basic pay voluntarily. That’s it. Today, most of us have not bothered where and how our savings are allocated by NPS or its impact. It is time for us to move from a passive state to an active allocation of our contribution to NPS.
Active Choice allows the individual and corporate contributors (Tier 1 contributors) to allocate up to 5% of our NPS investments to assets in Category A that represents ‘Alternative Investment Funds (AIFs)’ including instruments like CMBS, MBS, REITS, AIFs, InvlTs, among others. SEBI has enabled the growth of these polling vehicles called Alternate Investment Funds through well-developed regulations in 2012.
Consider a few data points:
The total Assets Under Management (AUM) under Tier 1 as of February 26, 2021, amounted to a staggering Rs 42,822.73 crore. However, a paltry 0.16% – Rs 68.37 crore – has been chosen by active investors to be deployed in Scheme A. Default options of Equity, G-Sec and Corporate Bonds are the most preferred (in that order).
The analysis shows that, of the Rs 68.37 crore under Scheme A, 66% are managed by private-sector pension fund managers. In comparison, the same set of managers hold 54% of the total assets invested.
Clearly, there is an opportunity – and responsibility – among private and public-sector pension fund managers to inform and educate NPS subscribers to exercise their active Choice and shift the permissible 5% to Scheme A. Depending on the government to do so is, in a way, relinquishing of responsibility and missing a larger opportunity in nation-building: by ploughing investments into listed companies and government bonds, there is minimal impact on employment generation – which is the urgent need for a country that is becoming a global benchmark in many other aspects. Instead, a sustained campaign to shake off inertia and get subscribers to invest in Scheme A actively will have a quantum impact on the distribution: Rs 68 crore can grow 31x to Rs 2,141 crore.
Let me refer to the Sept’2020 CRISIL Benchmark report on 253 AIFs of vintage FY14 to FY19 the pooled IRR stands between 6.59% to 26.62% with the top quartile return ranging from 11.1% to 28.44%. Such an IRR is todays time of low-interest scenario must encourage pension fund managers to allocate capital in Category 1 & 2 AIFs over REIT, InvIT or Mortgage-Backed Securities (MBS).
Now, imagine this corpus available to startup founders who are in synergy with the Atmanirbhar Bharat mission in diverse sectors. Imagine the multiplier effect on job creation and the nation’s catapulting as a formidable startup eco-system on the global stage. And each of us needs to initiate this at our own levels to build up into a movement that propels our economy forward.
Let us all, as private-sector employees, come forward to make an Active Choice to allocate up to 5% towards alternate assets.
To quote an ancient Babylonian scholar: “If not us, who; if not now, when?”
The author is managing director and fund manager, YourNest Venture Capital