Policy confusion

The government seems to be keen to allow 100 per cent foreign direct investment in pension funds, with foreign firms being allowed to enter the domestic pension market through fully-owned subsidiaries.

Insurance companies have been quick to point out that this is strange, as foreign insurers are allowed only a 26 per cent stake in insurance companies at present.

Although the government announced in the Union Budget that this stake would be raised to 49 per cent, opposition from the Left has made that proposal a non-starter.

The different FDI limits in the pension and insurance businesses are therefore anomalous""after all, pension funds and insurance companies are more or less in the same business, both having to manage assets to ensure that they can take care of long-term liabilities.

As a matter of fact, several foreign partners in insurance companies have already started talking of setting up pension fund entities on their own, ditching their Indian partners.

Globally, the pension fund business is bigger than the insurance business, and allowing foreign players into the pension market while keeping them away from the insurance market doesn't make sense.

Nor is the anomaly in FDI between the pension and insurance markets the end of the matter""100 per cent FDI is also allowed in asset management companies in the mutual fund industry, and in the broking industry.

Perhaps the government has equated the mutual fund industry with the pension fund industry, which is why they are pushing for 100 per cent FDI.

But pensions form part and parcel of the social security net of a country, making them far more important than mutual funds. In terms of social importance, it can be argued that pension funds will occupy as important a place as bank deposits""the failure of a pension fund will affect as many people as the failure of a bank.

Even insurance companies have the same level of social responsibility. And yet, foreign direct investment and foreign portfolio investment in banks are capped at 74 per cent, with the limit for public sector banks being 20 per cent.

Foreign banks can also open branches in the country. And for housing finance companies, the cap is 75 per cent for FDI and 75 per cent for FIIs, with HDFC having a total foreign shareholding of 76.46 per cent.

In short, there seems to be no clearly thought-out policy on FDI in the financial sector, with widely different sectoral caps for very similar lines of business.

The only thing that's clear is that the differing FDI ceilings are the result, not of economic policy, but of political convenience.

Faced with opposition from well-entrenched trade unions in the public sector insurance and banking industries, the government has fought shy of having higher FDI and FII limits, while in the newer sectors where there are no vested public sector interests, such as mutual funds, brokerages or pension funds, there is no problem in allowing 100 per cent FDI.

The rational course of action would be to allow the same level of foreign ownership across the financial services sector, provided the applicants meet reasonably stringent criteria laid down by the regulators.

Once such a policy is adopted, it will help not only in garnering more FDI, but will also ensure that global best practices are adopted in the sector.