A circular issued by the Pension Funds Regulatory and Development Authority (PFRDA) on foreign direct investment (FDI) in pension funds is all set to pave the way for a new round of licensing for pension fund managers. Lack of clarity on the FDI issue had delayed the issue of a fresh request for proposals (RFP) and kept the industry locked into the old license regime with fees capped at extremely low levels.
Apart from potentially higher fees, the fresh round may also see permanent licenses being issued to pension funds, a senior official at the regulator said. In the previous round of licensing only five-year licenses were issued.
“A pension fund management company is not allowed to do any other business. Hence players are reluctant to invest in such a company for the prospect of just a five-year license. A permanent license on the other hand will generate more confidence among investors. The regulator can always revoke the license and deregister a pension fund if rules are not followed,” the official said.
In addition, pension fund manager fees under the old licenses are capped at just 0.01%, making the business unremunerative for most players. The new RFP is expected to alter this scenario.
The FDI threshold in insurance was raised from 26% to 49% in 2015. Since the FDI threshold in pensions is linked to insurance, the latter also got a green flag for a hike. In October 2019, foreign investment in the pension sector up to 49% was permitted under the automatic route. However, there was ambiguity on how the foreign ownership is to be calculated.
The latest PFRDA circular brings this ambiguity to an end. It includes direct and indirect ownership within the limit for calculations but carves out an exception for banks and public financial institutions such as LIC and UTI.
For instance, if an insurance company or asset management company (AMC) with 49% foreign ownership sets up a fully-owned pension fund subsidiary, the latter cannot have any additional foreign ownership. However, if a bank with 49% foreign ownership sets up the pension fund in question, this will be ignored. The pension fund subsidiary can have additional FDI up to 49% of its own.
The aforementioned official added that RFP for fresh pension fund manager licenses could be issued by the regulator within as little as a month.
The industry response to the circular has been mixed. “The circular is welcome but there are a few issues,” a senior executive at a pension fund said on condition of anonymity. “Most existing pension funds are housed under asset management companies (AMCs) or life insurance companies. These will have to be shifted to banks to benefit from the carve-out. This may necessitate approvals from RBI,” he added.
The Reserve Bank of India (RBI) has lately become wary of banking exposure to other financial services. As Mint reported here, the central bank wants lenders to limit their non-bank risks and focus instead on boosting credit growth in a slowing economy. However, the clarity on FDI will finally set in motion the long due process of licensing the pension fund managers afresh.