House panel may suggest 26% pension FDI

Finance ministry against prescribing the limit in PFRDA Bill.

Though the finance ministry has declined to specify a ceiling for foreign direct investment (FDI) in the pension reforms Bill, the Parliamentary Standing Committee on Finance is likely to suggest a cap of 26 per cent FDI in pension funds in line with the limit for the insurance sector.

The Insurance Bill proposes to increase the limit to 49 per cent, but the panel might recommend keeping it at 26 per cent for both the sectors. Later, when the FDI limit in insurance is raised to 49 per cent, the ceiling for pension should also go up simultaneously, said a member of the committee.

In a meeting with the standing committee on Thursday, the finance ministry said FDI in pension funds could be capped at 26 per cent on par with the insurance sector, but a ceiling for the same could not be specified in the PFRDA Bill.

“We asked a few more questions and the finance ministry is expected to send its response shortly. The committee expects to clear the Bill by the first week of September after adopting it,” the member said.

In a written reply to a query by the standing committee on why a provision for FDI ceiling was not made in the PFRDA Bill itself, the ministry said this was in line with most other legislations in the financial sector where the cap is prescribed under the Foreign Exchange Management Act (FEMA) of 1999. However, FDI for the insurance sector is determined under the Bill itself.

The finance ministry explained that the foreign investment limit for private sector banks, stock exchanges, asset reconstruction companies, credit information companies and many others was not determined under their respective legislations, but under the regulations framed under FEMA.

The finance ministry also justified its decision of not providing guarantee of minimum returns under the PFRDA Bill. It said such a move might involve open-ended and massive transfer payments from the government’s budget in case the “ex-post pension wealth of the subscribers of the pension system turned out to be less than the desired minimum”.

Once cleared, the PFRDA Bill will grant statutory status to the interim pension regulator to form rules regarding pension funds and provide old-age income security to the people.

The decision to take up the Bill in the current session came after Finance Minister Pranab Mukherjee requested the chairperson of the standing committee on finance, Yashwant Sinha, to clear it at the earliest as the idea of pension reforms was conceived during the National Democratic Alliance regime.

The PFRDA Bill was first introduced in Parliament in 2005. It was referred to the Parliamentary Standing Committee which recommended that FDI in pension should not be at variance with the insurance sector. The Bill lapsed in Parliament with the expiry of the previous Lok Sabha in 2009.