PFRDA may issue FDI norms for pension funds

The Pension Fund Regulatory and Development Authority (PFRDA) might come out with foreign investment guidelines for downstream investments in pension funds, to help overseas investors.

These would be in sync with the guidelines of the Department of Industrial Policy and Promotion (DIPP), sources said.

“Now, we are proposing a new set of FDI (foreign direct investment) guidelines. In these, there will be a way to calculate foreign investment on the lines of formulas set out by DIPP,” a key source said.

According to DIPP guidelines, all investments into downstream projects by a company owned and controlled by a foreign entity is treated as indirect foreign investments. So, if a company Y has foreign investment of, say, 75 per cent and invests 26 per cent in company X, the entire 26 per cent investment by company Y would be treated as indirect foreign investment in company X.

However, if a company is owned and controlled by residents, then its downstream investment is not treated as foreign investment.

For this purpose, DIPP had changed the rules for control. An entity could be controlled by foreigners even if they own less than 51 per cent, provided the right to appoint a majority of the directors or to control the management or policy decisions rests with them. Various types of instruments qualify for indirect foreign investment such as those by foreign portfolio investors, qualified foreign investors, non-resident Indians, those through American depository receipts or global depository receipts, foreign currency convertible bonds, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible debentures. The issue is important for pension fund managers (PFMs), as the PFRDA allows only the sponsored route for investments. These can’t come on a standalone basis. “Here the regulation is that a PFM cannot be promoted by individuals but only by entities regulated by the financial sector regulator,” the source clarified. A PFM can only be sponsored by a bank, an insurance company or an asset management company. For instance, HDFC Pension Management Company Limited is a wholly-owned subsidiary of HDFC Standard Life Insurance Company.

The major shareholder in these PMFs are sponsor and hence a large part of the foreign investment is an indirect one, the source explained.

“However, direct foreign investment in PFM may still come,” he said. Right now, there is no direct investment in PFMs so far, he said. He said PFRDA will streamline foreign investment regulations. “It will be a clear signal to potential investors that PFRDA guidelines are these. It will provide more clarity. Foreign investors will definitely participate after this,” the source said.

Foreign investment limit in PFMs is 49 per cent, in line with insurance companies. The cap on foreign investment in PFMs move in sync with the insurance sector.