Reducing FII dependency

The Pension Fund Regulatory and Development Authority (PFRDA) Bill, passed by Parliament after a long delay, is a significant piece of legislation. It puts the pension sector under a statutory authority, which is independent of the executive and armed with powers to provide robust regulatory supervision. This is in contrast to the existing authority, constituted by executive action to oversee the New Pension System (NPS), which has managed the pension funds of civil servants since 2004 — and, lately, that of some individual subscribers as well. A statutory PFRDA, armed with penal powers over the entities it regulates, will infuse greater confidence and help attract more subscribers.

A strong pension sector regulator is also important from the perspective of stock markets. Foreign institutional investors (FIIs) today own 40 per cent of the value of shares available for trading in Indian exchanges. That makes the markets vulnerable to FII withdrawal. We have had a small taste of this in recent months, with FIIs moving out funds in anticipation of an impending tapering of the US Federal Reserve’s monetary stimulus programme as well as asset price erosion on account of the weakening rupee. The withdrawal has exposed the absence of support from domestic investors who are willing to take a contrary view when FIIs push the sell button.

A PFRDA that can effectively regulate the operations of pension fund managers investing NPS monies will help reduce our vulnerability to FIIs. But it will take a few years for funds flowing into equities from NPS schemes to be substantial enough to counteract FII sales. Meanwhile, it is worth reigniting the debate about the wisdom of making the Employee Provident Fund Organisation (EPFO) park a small part of the funds it manages in the equity market. Even if as little as 5 per cent of its Rs 500,000-plus crore corpus is invested in stocks, it will provide a cushion against FII sell-offs. With the shares of many companies trading below their book values, investing money in stocks at this juncture can fetch good long-term returns for its five-crore EPFO subscribers without a great risk of capital loss. The case for this has been bolstered by the recent volatility of government bonds, in which most of EPFO money is currently invested. Another option is to breathe some life into the Rajiv Gandhi Equity Savings Scheme, which has been weighed down by a tangle of rules ostensibly drafted to protect the small investor. Removing the income threshold and allowing all investors (new and existing) to claim tax exemptions up to a certain amount on yearly equity investments can bring back the much-needed ‘domestic’ interest in Indian markets.

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