Pension sector may be allowed 100% FDI

Government blows hot & cold on foreign direct investment

The government is in favour of allowing up to 100 per cent foreign direct investment (FDI) in the pension sector, which is expected to have a regulator with a "limited" number of fund managers soon, a top finance ministry official said today.

"We will pitch for 100 per cent FDI," UK Sinha, joint secretary in the finance ministry told reporters on the sidelines of a seminar on pensions, organised by the Invest India Economic Foundation.

The finance ministry has finalised a Bill for setting up the Pension Fund Regulatory & Development Authority and the Cabinet would take it up soon, he said, adding that the minimum capital requirements and the number of pension fund managers, would be decided by the regulator, though one fund manager would be from the public sector.

Sinha said a central record keeping and accounting agency (CRA), which would be the nerve centre of the new defined contribution pension scheme, would be place in the next four-five months.

Already about half a dozen entities, including the National Securities Depository Ltd, the Central Depository Securities Ltd, UTI-ISL, Stock Holding Corporation of India and the US-based Principal group, have shown interest in becoming the CRA, he added.

While the regulator would ensure that fund managers met the minimum capital requirements and had a good track record, the government was also proposing strict penalties for fund managers who indulged in "deliberate misdemeanours", he said.

Sinha pointed out the ministry had earlier estimated that 50,000 employees would join the scheme in the first year, amounting to an additional burden of Rs 60 crore, but the present trends indicated that over one lakh employees were likely to join the scheme in the first year.

He said five states "" Tamil Nadu, Rajasthan, Andhra Pradesh, Himachal Pradesh and Chhattisgarh "" had already notified the new pension scheme and others like Orissa, Kerala, Goa and Uttar Pradesh had expressed interest in joining the scheme.

Explaining the rationale behind pension reforms, Sinha said the Centre's pension liabilities had shown a compounded annual growth rate of 21 per cent in the 1990s and had risen to Rs 23,158 crore in 2003-04, amounting to 13 per cent of the total tax-revenue while the states' liabilities had gone up by 27 per cent.

Under the new scheme, both the employers and employees would have to contribute 10 per cent of the salary (basic pay and dearness allowance) and there would be broadly three schemes "" equity, debt and balanced funds.

Sinha said the monthly contributions to the scheme would not be taxed nor would the annual accumulation be taxed. However, a tax would be imposed at the withdrawal stage barring the amount which accrues as monetised annualisation.

He said that the Reserve Bank of India would also soon introduce real-time gross settlements.