FDI in Pension Funds

Author: Aakarsh Kamra*

Recently the Government in a desperate attempt to revive the failing economy announced a slew of reforms comprising mainly of allowing foreign Direct Investment in various sectors such as Multi Brand Retail, FM Broadcasting, Power exchanges and civil aviation. There has been an unending debate and a great opposition on the issue whether the decision of allowing a cap of 51% FDI in Multi Brand Retail is beneficial for the Nation. In between all this, the Government has recently increased the cap on FDI in Insurance sector from 26 to 49 % and announced a similar cap on FDI in Pension Funds.

For Pension funds the PFRDA Bill has been pending for quite some time now. The Bill lapsed due to dissolution of the Lok Sabha. In 2011, the PFRDA Bill sought to regulate the NPS (National Pension Scheme) products mandating PFRDA approval. It is important to note that there is a complete lack of awareness and certainty with NPS. Infusion of more capital in the sector has the potential of greater investment thereby creating more awareness.

The standing committee on Finance headed by Sh. Yashwant Sinha recommended that FDI in insurance sector be capped at 26%. Earlier the PFRDA Bill had no provision relating to FDI in pension Funds and the government was keen on adopting the route via FEMA rather than prescribing relevant measures under a legislation. It is only after the recommendations of the standing committee that the PFRDA Bill talks about FDI in pension funds mirroring that of the Insurance sector. Unlike FDI in Multi brand retail which is an executive decision, the measures relating to raising the cap on FDI require parliamentary approval. In the prevailing political scenario, when UPA-II is not in majority raking up the minimum numbers for the said approval looks improbable.

Recently the Trinamool Congress withdrew support from the government. Mamta Banerjee vehemently opposes FDI in Pension funds along with multi brand retail claiming that the proposed cap will make the lifelong savings of individuals totally insecure. Keeping aside the politics behind the issue, it is an undeniable fact that the sectors of Insurance as well Pension funds are in real need of capital. In the words of Mr. Raghuram Rajan, the Chief Economic Advisor, the government must focus on FDI and open more sectors to such inflows. Mr. Rajan believes that the safest form of financing is through FDI as it is long term and overdependence on FII’s is not a safe bet.

ASSOCHAM, in a study has highlighted the importance of FDI in Pension Funds

  1. In India, a vast majority of its population is not covered by any formal old age income scheme.
  2. The unorganized sector does not have any access to formal channels of old age economic support.
  3. It is imperative that a strong pension plan be devised to address the need for an efficient social security net since the present average life expectancy at 60 will increase significantly in addition to a substantial increase in the population at present and in the years to come.

Currently, Pension funds in India are managed by IDFC, SBI, Kotak Mahindra, Reliance Capital and Life Insurance Corporation. These funds constitute less than 7% of GDP compared to 100% in the US. Pension Funds in India are regulated by provisions of PFRDA (Pension Fund Regulatory and Development Authority). According to an OECD report Pension fund assets in BRIC countries are relatively low in relation to their GDP; 17% in Brazil, 2% in Russia, 5% in India and 1% in China. The Pension Funds with the proposed reforms will potentially contribute a lot to the infrastructure sector bringing in 103.49 Billion which is close to 1/10th of the Infrastructure Investment requirement under the 12th Plan. Thus the proposed reforms in pension funds hold a bright prospect in bringing economic progress.

As is the case with majority of Policy decisions and lessons from the recent Vodafone issue, it is of prime importance that before the government decides to go ahead with such reforms, foremost, a certainty in the legal framework regarding pension funds be achieved. This in turn would also help in improving business and investor confidence. Further it is in the larger interests of the Industry that a mechanism be brought in place which would facilitate consultation between centre and state governments so that when a decision is taken, its implementation does not get affected unnecessarily due to political or other factors.

*Aakarsh Kamra is a Post-Graduate  (LL.M) in Law, Science & Technology from National Law Institute University, Bhopal. He is currently practicing as an Advocate at the H’ble Supreme Court of India and High Court of Delhi. His areas of practice are Corporate Law, Competition Law, Intellectual Property Rights, Arbitration & Mediation etc.

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