Pension fund FDI cap proposed at 49%

K.R. Srivats New Delhi | Updated on June 21, 2020

Curbs recommended on investments from neighbouring nations

A comprehensive framework for foreign investments in the pension sector may soon be a reality, with the Department of Financial Services (DFS) coming out with draft rules.

The draft rules propose that total foreign investment — covering both direct and indirect investments — can go up to 49 per cent in an Indian pension fund and the calculation would be done under regulations to be framed by PFRDA along with the Centre’s Consolidated FDI policy.

This is the first time the government is directly introducing an FDI limit of 49 per cent in the legislative framework for the pension sector, official sources said. Till date, the PFRDA Act, 2013, stipulated that FDI in pension funds will be capped at 26 per cent or the level specified under the Insurance Act (which now specifies the FDI limit at 49 per cent), whichever is higher.

Also, in the PFRDA Act, there was no clarity on how direct and indirect holdings will be computed to ascertain the FDI cap, they added. Now, the latest draft DFS rules have covered this and put the ball in pensi,on regulator PFRDA’s court in deciding the manner of computation.

The absence of clarity in the FDI policy had dampened foreign investor interest, pension industry observers noted. Now the rules have also made it clear that increase in foreign investment in a pension fund should be in accordance with the pricing guidelines specified by the RBI under FEMA regulations.

Chinese wall

While allowing up to 49 per cent FDI in pension funds under the automatic route, the proposed rules have, however, stipulated that this route will not be available for foreign investments coming from any bordering countries, including China. This rule is in line with the FDI restrictions introduced by the Department for Promotion of Industry and Internal Trade (DPIIT) in April. It also comes in the backdrop of the ongoing tension between the the Indian and Chinese armies in Ladakh.

Ownership and control

Also, the draft rules — for which public comments have been invited, within 30 days — stipulate that pension funds in India should ensure that their ownership and control remain at all times in the hands of resident Indian entities. The draft rules specify what constitutes Indian ownership and Indian control.

Experts’ take

RV Verma, former PFRDA Member, told BusinessLine that the proposed rules augur well for the pension fund industry as foreign investments will bring in transparency and efficiency through greater due diligence.

Srinath Sridharan, a senior industry advisor, said that pensions are always a long-term strategic financial asset-based industry in any economy and more socially-sensitive for a country like India with a large population. “Any ownership in this sector will be deeply regulated with adequate fit and proper and global background checks of Indian and foreign sponsor investors. Rightfully so, the regulator has only allowed a handful of Indian entities to enter this space so far,” he said.

Published on June 20, 2020

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