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Nod for 26% FDI in pension funds

Nod for 26% FDI in pension funds
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First Published: Thu, Nov 17 2011. 01 07 AM IST

File photo
File photo
Updated: Thu, Nov 17 2011. 01 07 AM IST
New Delhi: The cabinet on Wednesday cleared amendments to the Pension Fund Regulatory and Development Authority Bill, 2011, capping the overseas investment limit in the sector at 26%, but retaining the flexibility to raise this limit by stating that it would not form a part of the legislation.
The government has thus rejected the recommendation of the parliamentary standing committee on finance that the 26% foreign direct investment (FDI) cap be a part of the Bill.
File photo
The legislation is expected to be introduced in Parliament during the winter session. With the government not accepting most of the recommendations of the standing committee headed by opposition Bharatiya Janata Party leader Yashwant Sinha, its passage may be difficult.
“The government is rejecting the consensus formed in the standing committee with a great deal of effort. Most of the members had agreed with the suggestions with the exception of Communist party members,” said Sinha, a former finance minister. “I will discuss with my party on what the next course of action will be. Our support cannot be taken for granted.”
The government is of the view that policy decisions on foreign investments in pensions should be kept outside the purview of the legislation and be regulated under the Foreign Exchange Management Act.
“FDI in pension will be capped on par with the insurance sector but the foreign investment ceiling for the pension sector need not be a part of the Bill,” said a government official, who did not want to be named. “Pension fund managers only perform fund management services, and do not solicit funds like insurance companies. Constant calibration of foreign investment may be required.”
The government has also rejected the standing committee’s recommendation to provide minimum guaranteed returns to investors. The committee had recommended that the minimum rate of return should not be less than that given by the state-run Employees’ Provident Fund Scheme. The government is of the view that such a move would curb the maximizing of returns and defeat the basic purpose of moving away from defined benefits to defined contributions.
“It’s a very good decision not to provide guaranteed returns. Even when you look at the performance of the Employees’ Provident Fund Organisation, real returns have been negative for a number of years. In comparison, the National Pension System (NPS) has provided much higher return in its short span,” said Gautam Bhardwaj, director of Invest India Economic Foundation, a consultancy specializing in pension reforms. “Guarantees will force pension fund managers to invest in government securities instead of the equity markets, limiting the upside.”
The Bill, which was introduced in March, proposes bringing PFRDA on par with other financial sector regulators by giving it a statutory status. It is the United Progressive Alliance government’s second attempt at putting in place a statutory framework for the sector. The previous Congress party-led government failed to push through a pension Bill in 2005 as the Communists, its allies at the time, refused to back the legislation.
The Bill will empower PFRDA to regulate NPS and introduce regulations to reform it.
remya.n@livemint.com
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First Published: Thu, Nov 17 2011. 01 07 AM IST