Sebi suggests task force to attract global pension funds

Mumbai: The capital markets regulator has suggested the finance ministry set up a task force to attract global pension funds to India, according to two people privy to the developments.

The task force will have representatives from the finance ministry, Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI) and market participants, who have experience in dealing with pension funds. The idea is to draw long-term and more stable money into the Indian capital markets.

The task force will suggest ways to iron out regulatory, tax and governance issues that are impeding the flow of global pension money into India, said one of the two people cited above on condition of anonymity as discussions are confidential.

“The proposed task force would examine issues relating to investment limits, taxation policy and protection of minority shareholder rights,” said the second person in know of the developments.

An email sent to Sebi on Friday seeking confirmation of the proposal went unanswered.

The policy changes may help attract $50-100 billion in the first year alone, said the first person cited above.

Pension funds invested about Rs.1.2 trillion (about $17.7 billion) in Indian equities and debt as of December, according to data available on the National Securities Depository Ltd.

This is a trickle compared to the overall size of assets under management (AUMs) of global pension funds. Institutional pension fund assets in the 16 major markets grew by over 6% during 2014 to reach a new high of $36 trillion, according to Global Pension Assets Study, a February 2015 report by global advisory firm Towers Watson and Co.

While the government and the regulators have in the past spoken of drawing in more long term money to India, this could well be the first concentrated effort to capture a share of the large pool of money managed by global pension funds.

The task force would identify global pension funds in jurisdictions such as the US, Europe and Japan. It could also look at utilizing platforms, such as San Francisco-based non-profit Pacific Pension and Insurance Institute, that have a large number of global funds associated with it to interact with the pension industry.

Pacific Pension has the largest number of major global funds as members.

The advantage of drawing pension money is that it tends to be more sticky and does not chase short-term returns.

These funds typically have an investment horizon of more than 10 years and often invest in large tranches.

Such funds, given their corpus and investment horizon, are also ideal for investments in sectors such as infrastructure through instruments like infrastructure bonds and infrastructure investment trusts.

Experts who deal with global pension funds say that the major concern is around the taxation of these funds.

“These funds look for certainty and clarity in the tax and regulatory regime as they have their own commitments to be met, vis-à-vis their stakeholders. Many of these funds enjoy tax concessions and other benefits in their home country; therefore, they look for similar concessions while making investments overseas,” said Vikas Vasal, partner and head (tax markets) at KPMG India, adding that pension funds are ideal investors for sectors such as infrastructure if some of these hurdles can be removed.

Another expert added that the withholding tax, which is set at a minimum of 5%, proves to be deterrent for such investments.

A withholding tax is the tax deducted at source that is levied by countries on the interest or dividends paid to a person resident outside that jurisdiction.

“In addition to the general concerns surrounding investments in volatile emerging markets such as India, the pension funds do generally face stringent regulatory and compliance issues in their home countries. Sebi has prescribed a favourable regime for pension funds to register as foreign portfolio investors, but tax aspects, specifically pertaining to interest withholdings, must be looked into to encourage greater participation,” said Tejesh Chitlangi, a partner at legal advisory IC Legal.

The US remains the country with the largest share of pension fund assets, accounting for about 38%, with Japan coming in next at 12%, according to a research published by Pensions & Investments and Towers Watson. The Netherlands has the third-largest market share at 7%, while Norway and Canada are the fourth and fifth largest, respectively, with around 6% share each.

Canadian pension funds have been among the most active in India. The Canada Pension Plan Investment Board, which manages Canadian $268.6 billion ($203.09 billion) in assets, had invested more than $2 billion in India till October. The fund’s top management which visited India in October said that they expect investments to rise over time.