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  1. IL&FS fallout: Tighter investment norms for pension funds on cards – All you need to know

IL&FS fallout: Tighter investment norms for pension funds on cards – All you need to know

According to the current investment guidelines of PFRDA, the PFMs could invest only in corporate bonds which are rated at least ‘AA’ by rating agencies. So a tightening could mean that investments by these entities in securities below AAA would be proscribed. However, a final call will be taken by the regulator.

By: | New Delhi | Updated: October 11, 2018 4:36 AM
Analysts said that tighter regulation for non-bank entities is in the offing, which might include tighter capital adequacy regulations, greater scrutiny on asset-liability mismatch and lower reliance on wholesale funding routes.

After regulatory review warnings by the Reserve Bank of India and the Securities and Exchange Board of India, the Pension Fund and Regulatory Development Authority (PFRDA) on Wednesday said it will ‘tighten’ investment norms for pension fund managers (PFMs) in the wake of defaults by IL&FS in servicing debt.

“After this problem in IL&FS, we will come up with some changes to the investment pattern in the next 10-15 days,” PFRDA chairman Hemant G Contractor told FE.

According to the current investment guidelines of PFRDA, the PFMs could invest only in corporate bonds which are rated at least ‘AA’ by rating agencies. So a tightening could mean that investments by these entities in securities below AAA would be proscribed. However, a final call will be taken by the regulator.

Among other steps, the pension regulator might prescribe guidelines to make it mandatory for PFMs to do their own due diligence on such investments and not do it solely based on views of ratings agencies, which have often proved wrong. The latest example was IL&FS, whose bonds were rated ‘AAA’, indicating the highest level of creditworthiness.

Domestic capital markets were roiled since the last week of September after IL&FS revealed a series of delays and defaults on its debt obligations. The IL&FS contagion spread to other non-bank finance companies (NBFCs) and housing finance companies (HFCs), resulting in tightening of liquidity to the sector and a sell-off of securities of many of these institutions.

IL&FS’ outstanding borrowings are in excess of Rs 91,000 crore and approximately Rs 20,000 crore are understood to be due for repayment within a year.

However, the exposure of PFMs in IL&FS group is in the region of Rs 1,200 crore. The PFRDA has asked the PFMs to look for an opportune time to exit the beleaguered company.

Yet, the pension regulator is concerned about the latest developments after IL&FS crisis. Of the entire corpus of about Rs 2.55 lakh crore in the national pension scheme (NPS), nearly 84% are invested in debt instruments including government securities and corporate bonds. Government employees (both central and states) contribute close to 90% of the corpus.
“A committee of PFRDA will decide on the streamlining of the investment norms shortly,” Contractor said.

Separately, the pension regulator said it is awaiting approval from the government to one of its proposals to allow more equity investment choice to government employees similar to the one offered to private sector under NPS. Private sector subscribers can invest up to 75% in equity products compared with only 15% by the government-sector subscribers. “It should be at least 25% for the government employees,” he added.

Returns from equity are much higher in the long term than debt instruments. Currently, there are eight PFMs including SBI Pension Funds, ICICI Prudential Pension Funds and LIC Pension Fund, which manage the corpus of the NPS.

Market regulator Sebi has already sought details from mutual funds about their exposure to the NBFCs and HFCs. Shares of NBFCs also took a hit on Monday after the RBI said on Friday it was looking at strengthening guidelines for such entities to avoid rollover risks.

Analysts said that tighter regulation for non-bank entities is in the offing, which might include tighter capital adequacy regulations, greater scrutiny on asset-liability mismatch and lower reliance on wholesale funding routes.

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