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Insurance and pension fund companies may get total freedom in deciding their investments to achieve higher returns and attract investments.
A committee set up by the finance ministry is set to recommend removal of all limits in investments in various assets in a far reaching liberalisation move. The recommendations may allow insurance and pension funds to invest across diversified assets like government securities, corporate securities, equity, mutual funds, securitised assets, gold, real estate and related commodities and sovereign funds of foreign countries among others.
These entities may also be allowed to invest in derivatives for better risk management, primarily for the purpose of hedging risky investments, as per the recommendations.
There will no limit decided by regulators in restricting the investments in a particular asset since it is restricting investments for higher returns which in turn is limiting investor appeal, said an official source close to the development. These recommendations will apply to all entities governed by Insurance Regulatory and Development Authority (IRDA) and pension Fund Regulatory and Development Authority (PFRDA). While limits will be internally decided by the board of the company, the companies – both life insurance, general insurance and pension funds will be governed by international norms of prudent investor rule.
Explaining this, an official close to the development said, the fund manager is expected to take calculated risk under regulatory environment where the decision making process must follow certain guidelines even if the final result does not satisfy the original intent. These guidelines will be cleared by the regulator for each company before they invest which will henceforth desist from prescribing limits in investments .
The committee is headed by former chairman of Life Insurance Corporation of India (LIC) and Securities and Exchange Board of India (SEBI). The committee will be forwarding its recommendations shortly to the finance ministry which has been guided by terms of reference to review the current investment pattern of insurance and pension funds. Besides, the committee is required to study the investment pattern followed in banking, capital markets before suggesting investment patterns keeping in the view the claims time cycle in insurance sector.
Explaining the prudent investor rule, official sources said that the rule will not always turn out to be a good investment, because no one can predict with certainty what will happen with any investment decision. Thus the Prudent Investor Rule is a legal doctrine which provides guidance to investment managers regarding the standards for managing an investment portfolio in a legally satisfactory manner.
Basically, prudent investing amounts to a process which one follows. If the process followed in making investment decisions is prudent (based on what is known and not known at that time), then the decisions being made are prudent, regardless of subsequent results.
Currently , the insurance sector is guided by limits in investment in indivisual categories of securities, limits in single company exposure, limits in investment in initial public offers of the companies, different exposure limits for private sector and public sector companies, perpetual debt securities, securitised assets like pass through certificates and asset backed securities and venture capital funds among others.
Similarly, the pension fund investments are guided by limits imposed on various asset classes like equity market instruments, government securities, credit risk bearing fixed income instruments etc.
