PFRDA approves 26% FDI cap in pension

Even as foreign direct investment (FDI) in the pension sector awaits a Cabinet approval amid political hurdles, the Pension Fund Regulatory and Development Authority (PFRDA) on Thursday said 26 per cent would be the FDI limit in the sector.

“The direct or indirect foreign investment in the Pension Fund should not exceed 26 per cent of the paid-up share capital or as may be laid down by the authority from time to time,” the interim regulator said in the guidelines issued for registration of funds from the private sector.

The PFRDA Bill, seeking to give statutory powers to the interim regulator, has not been cleared by the Cabinet so far, as one of its key allies is opposed to it. An earlier Bill, tabled last year, had kept a decision on FDI in pension funds out of the purview of legislation.

SLOW PROGRESS

• The PFRDA Bill, seeking to give statutory powers to the interim regulator, has not been cleared by the Cabinet so far
   
• An earlier Bill, tabled last year, had kept away a decision on FDI in pension funds out of the purview of legislation
   
• FDI is currently capped at 26 per cent in the insurance sector and the government plan to hike it to 49 per cent is pending for long
   
• PFRDA chairman Yogesh Agarwal said the draft bill says the FDI cap would be same as that in insurance
   
• The new system lays down the eligibility criteria for registration as pension fund managers (PFMs), and all interested players desiring to enter the pension industry can register as PFMs subject to their fulfilling the eligibility criteria, according to the finance ministry

However, after Parliament’s standing committee on finance recommended the decision be made part of legislation, the finance ministry agreed to it to rope in the Opposition to clear the Bill.

The Cabinet note is understood to have pegged the FDI cap in pension funds at the level of the insurance sector or 26 per cent, whichever was higher. FDI is currently capped at 26 per cent in the insurance sector and the government plan to raise it to 49 per cent is pending for long.

PFRDA chairman Yogesh Agarwal said the draft bill says the FDI cap would be same as insurance. “The limit was fixed, keeping in mind the clause in the draft bill,” he told Business Standard.

The guidelines not only capped the FDI in the pension sector; it also defined the method of calculation. It would exclude FII holdings, other than the foreign promoters of the applicant and their subsidiaries and nominees.

In the guidelines, pension fund managers (PFMs) will now be allowed to prescribe their own fee charges to manage a National Pension System (NPS) for the non-government and private sector, as the sector regulator has done away with the bidding process in which a uniform fee was charged of all the players.

“The new system lays down the eligibility criteria for registration as PFMs, and all interested players desiring to enter the pension industry, can register as PFMs subject to their fulfilling the eligibility criteria,” the finance ministry said in a statement.

It is expected that this would provide for an economically viable business model for the PFMs attracting a fresh set of entrants into the pension industry. The resultant competition would ensure market-driven fee structures, which would work to the advantage of the pension subscribers, the ministry said.

In the earlier system, a pre-determined number of slots were bid for by the PFMs. Now there will be no limitation on the number of PFMs. Further, the PFMs would be free to decide their fee charges, subject to an overall ceiling to be laid down by the PFRDA.

The government is also expecting that the PFMs would market NPS to the potential subscribers, deciding their own marketing and distribution channels as per their business perceptions.

The changes are as per the recommendations of the Bajpai Committee, set up by PFRDA to go into the reasons for the slow progress of NPS in the private sector.

The scheme was opened for the private sector about three years ago, but it has not made much progress since then.