Private pension funds will likely be allowed to double investment in select equities, cut exposure to low-yielding government debt and invest in rupee bonds offered by multilateral agencies such as the World Bank as part of a drive by the Centre to ease regulations in the pensions sector.
The new norms would provide a fresh source of funds to the stock markets and allow non-government pension funds to offer potentially better returns to retirees. The Sensex, the bellwether for the Indian stock market, has almost doubled in the last two years though it slumped this year on rising inflation and declining foreign investment inflows.Private pension funds would be allowed to invest as much as 10% of their corpus in selected equities, up from 5%, as part of the reforms. “The government is coming out with these reforms to ease out inflationary pressure in the economy,” said Sandip Mukherjee, an executive director at accounting and consulting firm Pricewaterhouse- Coopers. “The move will have an impact on demand for money and can decrease inflation. Moreover, investment in equity will give a tremendous boost to the stock market.” Describing the changes as “big ticket”, a senior government official, who did not wish to be named, said the regulations were being fine-tuned and would be released by the finance ministry in “five-six days”. The changes are being made after the ministry reviewed comments received on a discussion paper it had put out on the subject last year.
Once the finance ministry approves the new investment norms, they will be referred to the Central Board of Direct Taxes, or CBDT, the ministry’s direct tax arm, for notification under the Income-Tax Act. Non-government pension funds would be offered tax exemptions on income earned from investment made in the pattern prescribed by the finance ministry. While no measure exists of the size of the corpus owned by these pension funds, officials say it will be “significant”, with some funds having a minimum size of Rs 100 crore.
According to the same official, the government has initiated changes that have made it mandatory for non-government pension funds to register with CBDT. “They (CBDT) have begun to compile the data and we should soon be in a position to make an estimate,” the official added.
The finance ministry had first allowed non-government pension funds to invest in capital markets on 24 January 2005. At that time, it had permitted the funds to invest up to 5% of their corpus in shares of companies that have an investment grade rating from at least two credit rating agencies. Now the ministry is propos ing to double the limit and permit investment in shares of companies in the BSE Sensex, Nifty 50 and equity oriented mutual funds.
At the same time, it has decided to scale down exposure on Central and state government securities from the current level of 40% to 35%. Multilateral institutions have been exploring options of providing long-term debt financing of 20 years or more for cash-strapped companies in India’s burgeoning infrastructure sector by issuing rupee bonds. It is expected that the government would permit private pension funds to invest in these instruments, too.
Explaining the rationale for the revision, the official said that there had been substantial changes in investment options in the last two years. Changes initiated this year by the Securities and Exchange Board of India, or Sebi, the stock market regulator, with respect to the regulation and listing of debt securities required that pension fund norms, too, be revised in tandem.
The Sensex has slumped 24% this year as rising fuel and food prices pushed inflation to the highest in more than 13 years, prompting the Reserve Bank of India to raise interest rates and driving up borrowing costs. The decline cut short an almost five-year rally spurred by an expanding economy and a flood of foreign investment chasing returns.
“Uptil now to invest in such funds was a very safe option,” said Ravi Trivedi, executive director at the consulting firm KPMG, about the proposed pension sector changes. “With opening of the investments in the stock market, you can grow in those riskier areas, but the limits in these investments should be kept low. There should be a good governance model around such new investment patterns.”
The new norms would provide a fresh source of funds to the stock markets and allow non-government pension funds to offer potentially better returns to retirees. The Sensex, the bellwether for the Indian stock market, has almost doubled in the last two years though it slumped this year on rising inflation and declining foreign investment inflows.Private pension funds would be allowed to invest as much as 10% of their corpus in selected equities, up from 5%, as part of the reforms. “The government is coming out with these reforms to ease out inflationary pressure in the economy,” said Sandip Mukherjee, an executive director at accounting and consulting firm Pricewaterhouse- Coopers. “The move will have an impact on demand for money and can decrease inflation. Moreover, investment in equity will give a tremendous boost to the stock market.” Describing the changes as “big ticket”, a senior government official, who did not wish to be named, said the regulations were being fine-tuned and would be released by the finance ministry in “five-six days”. The changes are being made after the ministry reviewed comments received on a discussion paper it had put out on the subject last year.
Once the finance ministry approves the new investment norms, they will be referred to the Central Board of Direct Taxes, or CBDT, the ministry’s direct tax arm, for notification under the Income-Tax Act. Non-government pension funds would be offered tax exemptions on income earned from investment made in the pattern prescribed by the finance ministry. While no measure exists of the size of the corpus owned by these pension funds, officials say it will be “significant”, with some funds having a minimum size of Rs 100 crore.
According to the same official, the government has initiated changes that have made it mandatory for non-government pension funds to register with CBDT. “They (CBDT) have begun to compile the data and we should soon be in a position to make an estimate,” the official added.
The finance ministry had first allowed non-government pension funds to invest in capital markets on 24 January 2005. At that time, it had permitted the funds to invest up to 5% of their corpus in shares of companies that have an investment grade rating from at least two credit rating agencies. Now the ministry is propos ing to double the limit and permit investment in shares of companies in the BSE Sensex, Nifty 50 and equity oriented mutual funds.
At the same time, it has decided to scale down exposure on Central and state government securities from the current level of 40% to 35%. Multilateral institutions have been exploring options of providing long-term debt financing of 20 years or more for cash-strapped companies in India’s burgeoning infrastructure sector by issuing rupee bonds. It is expected that the government would permit private pension funds to invest in these instruments, too.
Explaining the rationale for the revision, the official said that there had been substantial changes in investment options in the last two years. Changes initiated this year by the Securities and Exchange Board of India, or Sebi, the stock market regulator, with respect to the regulation and listing of debt securities required that pension fund norms, too, be revised in tandem.
The Sensex has slumped 24% this year as rising fuel and food prices pushed inflation to the highest in more than 13 years, prompting the Reserve Bank of India to raise interest rates and driving up borrowing costs. The decline cut short an almost five-year rally spurred by an expanding economy and a flood of foreign investment chasing returns.
“Uptil now to invest in such funds was a very safe option,” said Ravi Trivedi, executive director at the consulting firm KPMG, about the proposed pension sector changes. “With opening of the investments in the stock market, you can grow in those riskier areas, but the limits in these investments should be kept low. There should be a good governance model around such new investment patterns.”
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