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Centre looks to revamp investment guidelines of insurance funds

Thursday, 30 Jul 2020
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The Central government is examining a proposal to revamp investment guidelines of the public sector insurance companies to promote larger flow of pension and insurance funds into the Infrastructure Investment Trusts (InvITs).

The companies include the Insurance Regulatory and Development Authority of India (IRDAI), the Employees' Provident Fund Organisation (EPFO) and the Pension Fund Regulatory and Development Authority (PFRDA).

The review may enable IRDAI to issue fresh guidelines, allowing insurance companies to invest in debt securities issued by InvITs, in line with traditional companies.

This could allow IRDAI to revisit the prescribed cap of five percent for insurance companies’ investment in a single InvIT, in line with the limit prescribed by the Securities and Exchange Board of India (SEBI) for mutual funds and its own cap for insurance companies while investing in listed equities.

Similarly, the Pension Fund Regulatory and Development Authority (PFRDA) mandates a minimum credit rating of AA for the sponsor of an InvIT to allow participation of pension funds. As InvITs are independent of their sponsors, the rating threshold could be made applicable only to InvITs and not to the sponsors.

InvITs is an asset monetisation model wherein developers monetise their investments in infrastructure projects to help raise funds for new project development.

The Indian InvIT market is in the nascent stage and has supported the formation of 10 InvITs so far, of which only two are listed. The leverage norms (debt to asset value) for InvITs were recently relaxed to 70 percent from 49 percent.

Indian pension funds, including NPS (National Pension System) and EPFO have assets under management (AUM) of over Rs 18 lakh crore (USD 250 billion). Similarly, insurance funds, including the Life Insurance Corporation of India (LIC), have AUM of nearly Rs 37 lakh crore. Thus, collectively, the pension and insurance AUM exceeds Rs 55 lakh crore (USD 760 billion). A large portion of the funds are invested in G-secs and other safe assets.

LIC has been investing in infrastructure created by the Centre and state governments, with the infrastructure AUM for fiscal 2019 at Rs 3.84 lakh crore or about 10.5 percent of the total AUM of Rs 36.65 lakh crore.

EPFO, with an AUM of Rs 11 lakh crore, is permitted to invest up to five percent in asset-backed securities, units of REITs and InvITs, up to 40 percent in equities (which include infrastructure equities) and up to 40 percent in debt securities (which may include infrastructure project debt securities).

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