NDA gives a gift to foreign pension funds - Livemint

The passage of the insurance laws (amendment) bill in Parliament raising the foreign investment limit to 49% from 26% had facilitated higher overseas investment in the pension sector. Photo: Priyanka Parashar/Mint

New Delhi: In a move that will facilitate management control of domestic pension funds by foreign entities, the government relaxed provisions on control when it notified the higher overseas investment limit of 49% in the pension sector on Monday.

This will, however, be on a case-to-case basis.

Pension funds are a key source of funding for long-gestation projects like infrastructure. At the moment they are mostly funded by commercial banks, causing an asset-liability mismatch—in some cases, resulting in the creation of bad debts.

The higher ceiling will be a composite cap made up of foreign direct investment and foreign portfolio investment and is expected to allow for greater participation of foreign funds in the National Pension System.

The passage of the insurance laws (amendment) bill in Parliament raising the foreign investment limit to 49% from 26% had facilitated higher overseas investment in the pension sector. This is because of a provision in the Pension Funds Regulatory and Development Authority (PFRDA) Act linking the foreign investment ceiling in the pension sector with that in the insurance sector.

However, the notification issued by the department of industrial policy and promotion (DIPP) makes a specific departure by omitting the clause laid down for the insurance sector on foreign control and ownership.

In the guidelines notified in March on foreign investment in insurances, DIPP said, "An Indian insurance company shall ensure that its ownership and control remains at all times in the hands of resident Indian entities."

Further, the new pension fund guidelines issued on Monday specifically allow foreign investors the right to exercise control over the pension fund despite the 49% investment ceiling, subject to approval by the Foreign Investment Promotion Board (FIPB).

"Wherever such foreign equity investment involves control or ownership by the foreign investor or transfer of control or ownership of an existing pension fund from resident Indian citizens and/or Indian companies owned and controlled by resident Indian citizens to such foreign investing entities... it would require FIPB approval in consultation with the department of financial services, PFRDA and other entities concerned," according to a press note issued by DIPP.

"The meaning of ownership and control would be as per the foreign direct investment policy," the DIPP note added.

As per the FDI policy, 'control' shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

A senior PFRDA official confirmed, on condition of anonymity, the relaxation on foreign investment and control in pension funds.

"In case there is a clause in the joint venture agreement about foreign investors having the right to exercise control over the pension fund, then they can seek the government's approval for this. The relaxation has been made because there may be cases where one foreign investor holds a substantial stake but the domestic promoters are many in number and hold small individual stakes," the official said.

This concession, which comes in the backdrop of Prime Minister Narendra Modi's meeting with top Canadian pension funds during his recent visit there, will encourage more foreign investment in the Indian pension sector, said analysts.

Anish Thacker, partner, tax and regulatory services, EY India, concurred with the interpretation that the government had indeed effected a relaxation in foreign investment norms for pension funds. "Foreign investors are not very excited about the increase in the foreign investment cap in the insurance sector. One of the reasons is the clause on ownership and control. The relaxation in rules for foreign investment in pension sector will see more interest from foreign investors," he said.

Entry of foreign pension funds will facilitate the government's efforts to ensure a rapid increase in pension coverage of the private sector workforce in India. A Crisil Research study, released in January, shows that there will be more than 300 million people over the age of 60 by 2050, compared with nearly 100 million people aged over 60 in India at present. If this segment of the population does not have sufficient cover, the government will have to support them, increasing its fiscal burden.

The National Pension System, which manages the central government, state government and the unorganized sector pension corpus, has over Rs.80,000 crore of assets under management.​

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