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A year on, still no decision on pension fund managers

LiveMint logoLiveMint 24-09-2017 deepti bhaskaran

On 17 September 2016, the Pension Fund Regulatory and Development Authority (PFRDA) invited fresh bids for managing funds for the private sector National Pension System (NPS). But a year later, the authority is yet to finalise the bids and issue fresh licences to the pension fund managers (PFMs) of NPS. In the interim, the managers continue to operate through an extension. “The request for proposal for the PFMs was valid till July. However, the regulator sought an extension of 3 months. In the interim, the existing PFMs can continue to function under the existing dispensation,” said Kumar Sharadindu, chief executive officer and managing director, SBI Pension Funds Pvt. Ltd. “After that, it is not clear whether pension funds serving the private sector (of NPS) will be legally valid,” he added.

However, according to Hemant G. Contractor, chairman, PFRDA, the PFMs will be given further extension of a month. But why this delay? According to the Authority, the hold-up is largely because it is awaiting clarity on the foreign direct investment (FDI) norms in the pension sector from the government. “Some PFMs are promoted by life insurance companies that already have a joint venture with a foreign partner. We await clarity on whether that needs to be taken into consideration while arriving at the 49% cap on foreign direct investment or not,” said Contractor. “We are hopeful to get some clarity on this soon,” he added.

So the PFMs continue to operate at the current investment fee of 0.01%, which, according to them, is unsustainable. 

Does the regulatory delay impact you? 

After PFRDA was notified as a statutory authority in 2014, it had to draft and notify regulations on various aspects of NPS. To be compliant with the new rules, it called for fresh bids on the investment fee or the fund management cost in September 2016 to issue fresh licences to PFMs. This was the third round of auction for NPS (started in 2009 for the private sector).

This time, instead of a bid to the bottom, the Authority put an upper limit of 0.1% on fund management fee. So bidders could bid within the band of 0 to 0.1% with 10 lowest bids being considered for licences. But PFRDA received only nine bids.  

Once the new licences are issued, each manager will be allowed to charge a fund management fee they had bid for, instead of the 0.01% that is applicable currently. 

These financial bids were made in December 2016; but even after 9 months, PFRDA has not finalised the process and issued fresh licences. The PFRDA Act links the FDI cap to the cap allowed in the insurance sector. So, when the Insurance Laws (Amendment) Act, 2015 increased FDI to 49% in Indian insurance companies, it also meant that the pension sector could allow an FDI limit up to 49%. “FEMA (Foreign Exchange Management Act) guidelines issued by the Reserve Bank of India last year state that PFRDA will have to formulate regulations to govern foreign investment in the pension sector. But till the time we do not have these regulations in place, we will have to rely on the FEMA master circular that doesn’t have a special carve-out status,” said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd.

Insurance regulations allow the foreign venture to own up to 49%, irrespective of the foreign holding permitted in the Indian parent company. “PFRDA also needs to make similar regulations and get an approval from the government,” Shukla added. 

The delay in approval is making PFMs restless. Although it doesn’t impact you directly as PFMs continue to function under the old charge structure, a delay is nevertheless a matter of concern for investors as well.

A clarity on FDI alone is no reason to delay issuing licences, according to Shukla. “Once the rules are clarified, PFMs that don’t fit the bill can have their licences rescinded or they can restructure to be compliant. But to hold off issuing fresh licences for so long hurts PFMs the most as we can’t invest in infrastructure and skill sets to manage the funds, which hurts customers plus growth of the sector,” he said. 

At present, even after having bid for a new fund management charge, PFMs are operating under the old charge of 0.01% which they find unsustainable. 

Manoj Nagpal, chief executive officer, Outlook Asia Capital said, the issue of FDI shouldn’t take so much time. “The PFRDA Act itself allows replication of insurance sector FDI rules, and in insurance the rules are laid down clearly. Implementing that shouldn’t take so much time, unless the sector regulator has reservations,” he added. 

The wait is hurting PFMs. “We don’t have the size to sustain low costs. Once the costs go up, we can look at promoting and marketing NPS although sales will still happen by the point of presence,” said Sandeep Shrikhande, chief executive officer, Kotak Mahindra Pension Fund Ltd.

NPS is just 8 years old, but has gone through many regulatory ups and downs. For its smooth functioning, the regulator needs to move fast and offer fresh licences to the fund managers.

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