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Pension ventures is under scrutiny due to lack of clarity on how foreign investment limit in the pension sector should be calculated.

The Foreign Investment Promotion Board had in a meeting in December 2015 recommended a Rs 1,705 crore foreign investment proposal for the consideration of the Cabinet Committee on Economic Affairs. FIPB did so even as the proposal is for investment below the prescribed Rs 3,000 crore threshold for such permission.

According to the proposal, Standard Life (Mauritius Holdings) 2006 Ltd wants to increase stake in the insurance venture HDFC Standard Life from 26 per cent to 35 per cent. At present, Housing Development Finance Corporation Ltd holds 70 per cent stake in the insurer. HDFC is majority foreign owned.

A senior government official said the proposal was sent to CCEA as a policy issue was involved. HDFC Standard Life has a wholly-owned subsidiary HDFC Pension Management Company Ltd, a licensed pension fund manager.

"We need to get clarity on whether downstream investments in companies which are engaged in selling pension products are also covered under the Insurance Act, which provides such leeway," said a senior government official, requesting not to be identified. The government has allowed 49 per cent FDI in both insurance and pension sectors. However, it has also provided specific exemption to insurance from the prescribed method of calculating direct and indirect foreign investment. Under this method prescribed in the FDI policy, all investment by a majority foreign owned or foreign controlled company in another company is counted as foreign investment.

However, there is a carve-out for such downstream investments in case of insurance sector, which is governed by its sectoral methods that do not count foreign portfolio investment in parent as FDI. This carve-out has allowed many private banks that are majority foreign owned to hold on to their insurance ventures even when the FDI limit in the sector was 26 per cent, which has since been raised to 49 per cent Under the rule applied to other companies, the entire holding of such banks would have been counted as foreign investment in violation of the policy.

Accordingly, the government had approved Kotak Mahindra Bank’s proposal to raise its foreign institutional investment cap in the bank from 49 per cent to 55 per cent, thus allaying fears that this may have implications for the bank’s insurance venture. The carve-out is not available for the pensions sector, leading to confusion over how foreign investment in downstream pension sectors will be calculated. "There is no clarity on pension ventures, whether that rule applies to them as well," the official cited earlier said. A similar issue is expected in other cases as well, he said. Another government official said that now the CCEA will take a call on this. "We want to remove any ambiguities and if the CCEA approves of it we will come out with a clarification as we did on the insurance sector," he said.