The Pension Fund Regulatory and Development Authority (PFRDA) have capped the equity exposure of New Pension Scheme (NPS) to 5% in sponsor group companies and 10% in other blue-chip companies. The move is aimed at preventing concentration of risks.
The PFRDA has also allowed Pension Fund Managers (PFMs) to park money in fixed deposits of more than one-year maturity of financially sound banks as part of their investment in fixed income instruments like investment grade bonds of corporate, infrastructure firms and municipalities. Banks should have a minimum net worth of Rs 500 crores and track record of consecutive net profit, a capital adequacy ratio of 9% and net non-performing ratio of less than 5% of advances in the last three years.
The change in rules has come amid demand from PFMs for widening the investment horizon.
Earlier, fund managers were allowed to invest only in equity index funds that replicated the sensex and Nifty. But the PFRDA had to change the investment rules as investing in equity indexes of mutual funds have become costlier owing to 1.5% expense ratio charged by fund houses.
In a notification, PFRDA has said that PFMs are allowed to invest in shares of companies which are listed in Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and on which derivatives are available or are part of the sensex and Nifty indices.
Investment in any equity stock of a sponsor group should be restricted to 5% or the paid up equity capital of all the sponsor group companies or 5% of the asset under management (AUM) of the NPS scheme, whichever is lower.
In case of non-sponsor group companies, the PFMs are allowed to invest up to 10% of paid up equity capital or AUM, whichever is lower.
Investment in Initial Public Offering (IPO) or Follow-on Public Offering (FPO) is not allowed. Also, investments in unlisted companies are not allowed.
PFMs are barred from short sale and carry forward transactions or engage in badla finance.
PFRDA has not raised the overall equity investment limit of 50%.
At present, the NPS corpus is managed by PFMs promoted by LIC, UTI AMC, SBI, ICICI bank, Kotak Mahindra Bank and Reliance Capital.
The total NPS corpus has grown to around Rs 28,000 crores at the end of February 2013 since its inception in January 2004. The corpus has grown 77% on year-on-year basis to Rs 15,163 crores in 2011-12 and 83% in 2010-11.
The NPS initially enrolled new central government employees and subsequently rolled-out to employees in 24 states, PSUs, corporates and even the unorganized workers.
Higher returns than Employee’s Provident Fund Organization (EPFO) and Public Provident Fund (PPF) have lured employees in private companies to enroll in NPS.
Since December 2011, about 400 corporate entities have enrolled new and existing staff under the NPS.