Union Cabinet Nod for 26% Foreign Direct Investment (FDI) in Pension Sector

The Union Cabinet on 16 November 2011 agreed to partially allow foreign direct investment (FDI) to enter the pension sector to the extent of 26 per cent, as is now available in the area of insurance. The cabinet however refused to mention any sectoral cap in the proposed legislation.

In its approval to amendments in the PFRDA Bill, 2011, the Cabinet turned down the Parliamentary Standing Committee's suggestion of providing a guarantee on assured returns on pension fund schemes. The provision with regard to the FDI cap for the pension sector was proposed to be incorporated in the regulations once the Pension Fund Regulatory and Development Authority Bill, 2011, is enacted.

Though the government is of the view that the FDI cap in the pension (sector) should be at 26 per cent, on a par with the insurance sector, it would like to retain the flexibility of changing the cap of FDI as and when required.

Pension Fund Regulatory and Development Authority Bill

The proposed legislation introduced in the Lok Sabha on 24 March 2011 was subsequently referred to the Standing Committee chaired by BJP leader and former Finance Minister Yashwant Sinha for scrutiny. In its suggestions, the committee wanted the government not only to specify the FDI cap in the legislation itself but also provide for a minimum guaranteed return to pension subscribers.

With the Cabinet's approval of some of the amendments proposed, the PFRDA Bill, which seeks to open the pension sector to private sector and foreign investment, will be taken up for consideration and passage in the winter session of Parliament.

The Cabinet turned down the committee's suggestion on providing greater flexibility to subscribers on withdrawal of funds from their accounts.

The PFRDA Bill provides for the setting up of a statutory authority to undertake promotional, developmental and regulatory functions with regard to pension funds.

The government decided not to mention the FDI cap in the legislation. The government has also not been able to raise the FDI ceiling in insurance from the existing 26 per cent to 49 per cent as the changes require fresh amendments. As a result, the Insurance (Amendment) Bill has been pending approval since 2008. Once the FDI caps are mentioned in the regulations, it will be easy for the government to modify the ceilings through an executive order, as and when required.