India Passes Pension Bill to Increase Foreign Investment
Sept. 5 – After nearly ten years of debates and negotiations, the Lok Sabha – India’s lower house of Parliament – finally cleared the long-awaited Pension Fund Regulatory and Development Authority (PFRDA) Bill today in a step towards creating a stronger pension industry and to attract additional foreign and private sector investments.
The bill must now go to the Rajya Sabha – India’s upper house of Parliament – where it is expected to obtain final approval soon.
“When the bill is passed, I expect that some more [foreign direct investment] will come in,” Indian Finance Minister P. Chidambaram commented.
The bill, which was created to assist with individuals planning for their post-retirement needs, also allows foreign investors to now acquire stakes of up to 26 percent in investments made in the pensions sector. It also stipulates that pension regulators will ensure that fund managers offer at least one product with an assured minimum return in order to protect investors from market volatility.
PFRDA chairman Yogesh Agarwal noted, “The [bill’s] immediate impact is that it will help provide better regulation of the pensions sector as it will give the regulator powers [and] will provide more confidence to investors and have a positive impact.”
The bill is also likely to cause the National Pension System’s (NPS) subscriber base, which is currently close to 530,000 members strong, to increase. The NPS – which is regulated by the PFRDA – has amassed over Rs 35,000 crore (US$350 billion) from its subscriber base, which is primarily made up of fund managers and government employees.
Several private sector companies, however, have shied away from the NPS due to a lack of clarity over its future despite its lower commission fees in comparison to other life insurance companies. So far, just eight private sector asset managers currently operate schemes in India managing a total of about 300 billion rupees (US$4.48 billion) in private sector assets, compared to a combined 5 trillion rupees (US$74.67 billion) managed by the state-owned provident and pension funds, and over 7.60 trillion (US$113.50 billion) rupees managed by Indian mutual funds.
Experts believe that the scheme could attract a significant chunk of India’s 460 million strong workforce, and add up to US$60 billion in the first year of its full launch, and over US$300 billion over the next ten years.
“The passage of the bill will attract more subscribers…civil servants have been the main subscribers to the NPS till now. But now, private sector companies and self-employed individuals will start to invest in the scheme,” commented Gautam Bhardwaj, co-founder and managing director of Invest India Micro Pensions Services.
Anil Ghelani, chief investment officer at India’s DSP BlackRock Pension Fund Managers Pvt. Ltd, had a more grim outlook, noting: “This is a welcome push for the industry as the bill has a progressive approach, but increasing the FDI cap in the pension sector might not immediately result in a large inflow of foreign capital.”
A revised insurance law is also currently being worked on, which would raise the foreign stakes cap in the sector to 49 percent, but it is unlikely to be approved soon.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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