Pension Money Will Soon be Allowed into IPOs

The Chairman of PFRDA, Mr. Supratim Bandyopadhyay, has mentioned in his recent interview that they are drafting new rules allowing pension fund managers to invest in the open market.

These rules, when finalised, will enable fund managers to invest in IPOs, and listed companies as they deem fit.

Why this Sudden Change?

As per current rules, PFMs can only invest in the equity portion of a fund traded in scrips on the future and option segment where the market cap is above Rs. 5000 crores.

According to the Pension Regulatory and Development Authority officials, this restricts the opportunities for fund managers. Citing the example of Avenue Supermarkets, where PFMs are not allowed to invest due to the aforementioned restrictions.

Point to note:

Since the beginning of the new pension scheme, fund managers have delivered an 11.13% compound annual growth rate on equity investment.

This new rule will empower fund managers to invest in IPOs, OFS, follow-on offers. Also, they can select a stock they want to invest in from the top 200 scrips traded on BSE and NSE.

Are there Any Specifications?

Yes, Mr. Bandyopadhyay mentioned that PFRDA would draft these rules keeping in mind the specifications required to tackle equity fund risks. However, since there is an uncertainty associated with start-ups and other companies that are going public but yet to deliver profit, NPS subscribers can get spooked.

Replying to this comment, he mentioned that pension fund managers would have the liberty to choose the company they invest in. Therefore, the experience of fund managers will come into play, and it can result in higher returns.

As of now :

• Equity investments have delivered 11.31% returns
• Government securities have delivered 9.69%
• Corporate debts have delivered 10.21%

With these new rules, PFRDA expects to drive this growth further and bring higher returns for their subscribers.

Moving Ahead

Debt market investment strategies have altered as well.

Fund managers are now opting for investments in intermediate maturity profiles less than 10 years old. The reason being, it lowers the chances of yields going down further.

Mr. Bandyopadhyay also said that government securities with a 10-years benchmark would harden to 6.25% to 6.50% without any interventions.

With this new ruling, he further added that PFRDA would allow fund managers to invest in debt papers issued by real estate agencies.

In Other Changes

PFRDA has decided to allow investors to withdraw up to 3 times during their active subscription. The aim here is to help individuals meet their liquidity crisis, but it will have a threshold of 25%.

He expects legislative changes during the Monsoon session of the Indian Parliament. He further contemplated on how enabling PFRDA to manage superannuation funds can result in better tax treatment for investors.

NPS currently has 7 PFMs, and new changes will open opportunities for new managers. He expects at least 2 AMCs, who are already managing over Rs. 50,000 crores to come up.

Adding New Members

Currently, the total number of NPS subscribers stands at 4.37 crores, with about 2.90 crores under Atal Pension Yojana. Mr. Bandyopadhyay mentioned that they had set a target to expand their investor base by 1 crore in FY2022. This will include 90 lakhs from Atal Pension Yojana.

He also stated that, despite the second wave of Covid-19, they had added 1.6 lakh subscribers in the first quarter.

Bottom Line

Allowing NPS and its fund manager to get involved in the open market brings new possibilities. NPS subscribers can benefit from this move, as they will receive higher returns. At the same time, it comes with its drawbacks as well. The open market is volatile, and it can leave negative impacts as well.

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Frequently Asked Questions

1. When will the new rules be available for PFMs?

They are likely to be available in 2 to 3 days, as stated by the officials of the Pension Regulatory and Development Authority.

2. Which AMC has already applied to be a fund manager for NPS?

Axis Mutual Fund has already applied to become a fund manager for NPS.

3. What is the percentage of FDI investment allowed by the government in PFMs?

74% foreign direct investment is allowed by the government in PFMs.

4. What is the total investment amount received by NPS via the D-remit facility?

Rs. 425 crores is the total investment amount received by NPS via the D-remit facility.