India Parliament Lower House Votes to Allow FDI in Pension Funds

India’s lower house of parliament passed a bill allowing overseas investment in the country’s pension funds for the first time, as the government tries to revive economic growth and stem the rupee’s slide.

The bill caps ownership by foreign companies at 26 percent in local businesses selling pensions. The threshold for foreign direct investment in pensions will be kept in line with the cap for insurance, which was opened to overseas companies in 2000. The legislation now needs the approval of the upper house.

Prime Minister Manmohan Singh is pushing for the changes after winning parliamentary backing for two key bills appealing to India’s poor voters as he seeks to return his party to power in elections next year. His second term has been marred by graft scandals, the weakest growth in a decade and capital outflows that contributed to the rupee’s 18 percent plunge against the dollar this year.

“This is one reform where the government has been successful in building consensus with other political parties in parliament,” said D.H. Pai Panandiker, president of the RPG Foundation, a New Delhi-based economic research group. “It is aimed at helping improve the economy. Unfortunately for the government it is going to take time to have any impact.”

The pension bill will also give statutory power to the country’s pension regulator, which has been functioning as an interim body for a decade without parliamentary approval. The government won support from the opposition for the legislation by accepting some of their suggestions.

New Products

Allowing foreign firms to invest in pension funds will bring in new practices, products and higher operating margins, according to Vishal Narnolia, a Mumbai-based analyst at SMC Global Securities Ltd.

The government is also negotiating with opposition parties to raise the FDI cap in insurance to 49 percent from the current 26 percent. Finance Minister Palaniappan Chidambaram told reporters after today’s vote that the government will not try to pass the insurance bill in the current session of parliament that ends this week.

Singh’s government has in the past been rebuffed in its efforts to lift the caps on insurance and pensions by rival political parties. Both bills have been introduced in Parliament before, with the government unable to win the support of groups ideologically opposed to private companies investing in pension or insurance funds, many of them state run.

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