New Delhi: A Bill to regulate the pensions business introduced in Parliament on Thursday by the United Progressive Alliance (UPA) government set a precedent by keeping the policy decision on foreign investment outside the purview of the legislation. The move insulates it from the kind of political opposition that has checked foreign investment in insurance.
The Bill said the foreign investment policy for the pension sector would be determined and notified outside the legislation under the Foreign Exchange Management Act.
“It’s a very useful precedent, a good way to think,” said Gautam Bhardwaj, director of Invest India Economic Foundation, a consultancy specializing in pension reforms. “It gives you a sense the government will give some independence to regulators to operate.”
The Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011, is the UPA’s second attempt to introduce a statutory framework for the sector. In 2005, the UPA was unable to push through a pension Bill as the Communists, then its allies, refused to back the legislation.
The UPA’s attempt to increase the foreign investment limit in insurance firms from the current 26% to 49% has been unsuccessful so far on account of political opposition to the legislation.
On Thursday, the government had some nervous moments when Communist Party of India-Marxist (CPM) parliamentarian Basudeb Acharia sought a vote to see if the Bill could be introduced as the treasury benches were almost empty.
Several Congress leaders, including party chief Sonia Gandhi, Prime Minister Manmohan Singh and finance minister Pranab Mukherjee, were absent in the Lower House.
The Bill was introduced after a division of votes, which showed as many as 115 members backed the proposed legislation, 43 opposed it and one member abstained. The 543-member House had just 159 parliamentarians present on Thursday morning.
The principal opposition Bharatiya Janata Party (BJP) supported the Bill. The first step to switch over to a new pension system, where contributions are defined, but terminal benefits are not guaranteed, took place in 2003 when the BJP was in power.
CPM’s Sitaram Yechury said his party is opposed to the Bill.
On the decision to exclude the foreign investment policy, he said: “This is sleight of hand. They are bypassing the legislative process and reducing it to an administrative decision.”
Yechury characterized this a dangerous move. “Much of the telecom problems happened because of the same approach, which left crucial decisions to regulators like Trai (Telecom Regulatory Authority of India),” he said. “They used the regulator to advance their policies instead of the legislative process.”
The UPA’s 2005 pension Bill did not specify a cap on foreign investment in pension fund managers.
The PFRDA Bill was later examined by a parliamentary standing committee, which said rules on foreign direct investment in the sector and investments by pension funds abroad should not be at variance with insurance regulations.
The standing committee of Parliament is examining an insurance Bill, which seeks to enhance the foreign investment limit to 49% from the current 26%. The pension sector has its own regulator, PFRDA, which started a market for pension products in 2008.
Unlike other financial services regulators, such as the Reserve Bank of India, PFRDA does not have statutory status. In case of violations, PFRDA can’t impose punishment, but has to use the judicial system to do so.