The pension has been an integral part of government jobs in India. Pension serves two important socio-economic objectives, it facilitates the flow of long-term savings for development, i.e., nation-building; and helps establish a credible and sustainable social security system in the country.
The Government introduced the New Pension Scheme, now known as the National Pension System (NPS), on December 22, 2003, and it became mandatory for all Central Government employees (except the armed forces) who began work on January 1, 2004. The scheme has now been extended to state governments, with 28 of them having notified NPS for their employees.
Since May 2009, the Scheme has been open to all citizens of the country on a voluntary basis. Although the NPS is one of the cheapest financial products available in the country, the government introduced a lower-cost version, known as the Swavalamban Scheme, in September 2010 to make it more affordable for the economically disadvantaged. Swavalamban could be used in the ‘unorganized sector or in WPS Lite, according to the existing NPS scheme.
NPS Lite is a model designed to bring NPS within easy reach of the economically disadvantaged sections of society; it is extremely affordable and viable due to its optimized functionalities, which are available at reduced costs. The government provides a subsidy to each NPS account holder under the Swavalamban scheme, which has been extended until 2016-17.
New Pension Scheme (NPS) Corporate Sector Model
The NPS Corporate Sector Model, a customized version of the core New Pension Scheme model, was introduced in December 2011 to allow ‘organized-sector’ entities to move their existing and prospective employees to the New Pension Scheme under its Corporate Model. Individual subscribers will be able to open online NPS accounts through a link on all public sector banks’ websites.
According to the Economic Survey 2012-13, India’s pension reforms have piqued international interest, but before the poorer sections of Indian society are fully integrated into the pension system, the economy must address the following major challenges:
- Lower levels of financial literacy, particularly among workers in the unorganized sector;
- Non-availability of even moderate surplus;
- The lukewarm response so far from most of the state/UT governments to a co-contributory Swavalamban Scheme; and
- Lack of awareness, on the supply side, about the NPS and access points for people to open their accounts individually have been major inhibiting factors.
Atal Pension Yojana
The government introduced a new pension scheme, the Atal Pension Yojana, in 2015-16. (Atal Pension Yojana). The scheme offers a defined pension based on the amount and duration of contributions. From the age of 60, subscribers will receive a minimum pension of Rs.1,000, 2,000, 3,000, 4,000, or 5,000 per month, depending on their contributions, which are based on the age at which they join the scheme.
All bank account holders are eligible for the program. For a period of five years (from 2015-16 to 2019-20), the central government co-contributes 50% of the total contribution, up to a maximum of Rs.1,000 per year, to each eligible subscriber’s account who joined the APY between 1 June 2015 and 31 March 2016, is not a member of any statutory social security scheme and is not an income taxpayer.
By September 2019, the APY had 1.78 crore subscribers and Rs.8,743 crores in Asset Under Management (i.e. returns on the corpus).
New Pension Scheme has enrolled approximately 3.06 crore subscribers (including Atal Pension Yojana) as of September 30, 2019. Between March and September 2019, the NPS’s Assets Under Management (which includes returns on the corpus) increased to Rs.3.71 crores (showing a growth of 16.71 percent).
New Pension Scheme Variations in 2019-20: The following are some major steps taken by the government in 2019-20 in relation to the New Pension Scheme:
- Choice of Fund: Similar Government subscribers have the same options as private sector subscribers in terms of pension funds, including private sector funds (which can be changed once in a year).
- Choice of Investment Pattern: Government employees may exercise one of the following choices of Investment Pattern twice in a financial year-
- The fund will be distributed among the three existing public sector fund managers for both existing and new subscribers, according to the PFRDA’s guidelines.
- Government employees who prefer a guaranteed return with minimal risk have the option of investing all of their funds in government securities.
- Government employees who prefer higher returns shall be given the options of the following two Life Cycle based schemes—
- Conservative Life Cycle Fund with maximum 25 percent exposure to equity.
- Moderate Life Cycle Fund with maximum exposure of 50 percent to equity. Financial Stability Development Council (FSDC)
GoI established an apex level body, the FSDC
The GoI established an apex-level body, the FSDC, in December 2010. It was in line with the G-20 initiative, which was launched in response to financial crises in western economies triggered by the United States’ “sub-prime’ mortgage crisis in 2007-08. The Council has the following objectives:
- To strengthen and institutionalize the mechanism for maintaining financial stability,
- To enhance inter-regulatory coordination, and
- To promote financial-sector development.
The Finance Minister chairs the council, which also includes the heads of financial-sector regulatory agencies, the Finance Secretary and/or Secretary of the Department of Economic Affairs, the Secretary of the Department of Financial Services, and the Chief Economic Adviser. The Council monitors- without prejudice to regulators’ autonomy-
- macro-prudential supervision of the economy, including the functioning of large financial conglomerates,
- inter-regulatory coordination and financial-sector development issues, and
- financial literacy and financial inclusion.
Financial Sector Assessment Programme (FSAP)
In September 2010, the IMF Board of Directors decided to add 25 systemically important economies, including India, to the Financial Stability Assessment Programme (FSAP) for members with systemically important financial sectors. In January 2013, India’s financial system was assessed against the highest international standards as part of the joint IMF-World Bank Financial Stability Assessment Programme (FSAP). The report acknowledges that the Indian financial system has remained relatively stable due to a strong regulatory and supervisory framework. However, the assessment identifies some gaps in—
- International and domestic supervisory information sharing and cooperation;
- Consolidated supervision of financial conglomerates; and
- Some limits on the de jure independence of the regulators (RBI and IRDA).
Despite reservations on a few points, the Indian authorities expect the FSAP exercise to play a significant role in shaping India’s post-crisis initiatives to strengthen the regulatory and supervisory architecture, based on evolving international consensus and careful examination of their relevance in the India-specific context. India is actively participating in post-crisis reforms of the international regulatory and supervisory framework under the auspices of the G20 as a member of the FSB20, BCBS21, and IMF. As a country with complex and diverse socio-political and economic conditions, India remains committed to adopting international standards and best practices in stages and calibrating to local conditions where necessary.
Financial Action Task Force (FATF)
The FATF is an intergovernmental policy-making organization with a ministerial mandate to develop international standards to combat money laundering and terrorist financing. In June 2010, India became the FATF’s 34th member. The FATF currently has 36 members, including 34 countries and two organizations (European Union and Gulf Cooperation Council).
Real Estate & Infrastructure Investment Trusts
The SEBI has finalized regulations for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (IITs) (InvITs). 22 The trusts, which have been in the works since 2008, aim to provide easy access to funds to cash-strapped real estate and infrastructure developers. They open up new investment opportunities for institutions and high-net-worth individuals, as well as ordinary investors.
Major provisions announced by the SEBI for the REITs are as given below:
- To be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unitholders.
- The returns will be derived mainly from rental income or capital gains from real estate.
- Permitted to invest directly or through special purpose vehicles in commercial real estate assets (SPVs). A REIT must own at least 50% of the share capital of an SPV and must invest at least 80% of its assets directly in properties.
- To raise funds solely through an initial offering, REIT units must be required to be listed on a stock exchange, similar to an IPO and listing for equity shares.
- At the time of the initial offer, the assets must be worth at least Rs.500 crore, and the issue size must be at least Rs.250 crore. The minimum subscription size for REIT units on offer will be 2 lakh, and at least 25% of the units must be made available to the general public.
- Will be able to raise funds through follow-on offers, rights issues, or qualified institutional placements, with a 1 lakh trading lot.
Although a REIT may raise funds from any type of investor, domestic or foreign, only wealthy individuals and institutions will be allowed to subscribe to REIT unit offers at first, according to the rules. A REIT may have up to three sponsors, each holding at least 5% and collectively holding at least 25% for at least three years from the date of listing, according to the market regulator. As a result, the sponsors’ combined holding must be at least 15% throughout the REIT’s life.
Sebi has decided to allow REITs to invest primarily in completed revenue-generating properties, similar to the practice in the United States, Australia, Singapore, and other countries where REITs are common. Sebi stated that at least 80% of a REIT’s assets must be invested in completed and revenue-generating properties to ensure that the REIT generates consistent returns. Only up to 20% of assets can be invested in under-construction properties, mortgage-backed securities, real estate debt, or equity shares of publicly traded companies that earn at least 75% of their revenue from real estate, government securities, or money market instruments. No REIT can invest more than 10% of its assets in under-construction properties.
InvITs, which are similar to REITs, have also been announced by SEBI. InvITs will not be required to make an initial offer, but they will be required to be listed, both publicly and privately. The major provisions are listed below.:
- It can invest in infrastructure projects, either directly or through an SPV (Special Purpose vehicle). In the case of public-private-partnership (PPP) projects, such investments will be only through an SPV.
- While listing, the collective holding of sponsors of an InvIT has to be at least 25 percent for at least three years.
- Required to have a holding worth at least Rs.500 crore in the underlying assets, and the initial offer size of the InvIT has to be at least Rs.250 crore.
- Any InvIT, which looks to invest at least 80 percent of its assets in completed and revenue-generating infrastructure assets, has to raise funds only through a public issue of units, with a minimum 25 percent public float and at least 20 investors.
- The minimum subscription size and trading lot of such a listed InvIT have to be 10 lakh and 5 lakh, respectively. A publicly offered InvIT may invest the remaining 20 percent in under-construction infrastructure projects and other permissible investments.
An InvIT that intends to invest more than 10% of its assets in under-construction infrastructure projects can only raise money through a private placement from qualified institutional buyers with a minimum investment and trading lot of 1 crore and at least five investors, with no single holding exceeding 25%.
Recent events include: The GoI implemented a friendlier tax regime in two successive Union Budgets, 2014–15 and 2015–16, to promote real estate and infrastructure trusts. The trusts, on the other hand, did not gain much traction. Basically, attracting investors—a new (greenfield) project or a trust—has remained difficult due to subdued market conditions in the sectors. The majority of existing projects in the sectors are losing money due to the developers’ weak balance sheets, which prevent them from servicing their bank loans.
To further the cause of trusts, the security market regulator, SEBI, allowed foreign portfolio investment (FPI) in trusts in 2019–20. It will only be known in the future how much interest the FPIs will show in the trusts; in the meantime, experts believe that real momentum in the sectors can only be expected once the economy emerges from its slump.