Sitharaman to chair Financial Stability and Development Council meet to harmonise regulations across sectors
Finance Minister Nirmala Sitharaman will soon chair a meeting of the Financial Stability and Development Council (FSDC) to nudge financial regulators to relax and harmonise investment norms for instruments like Infrastructure Investment trusts (InvITs) to be used to monetise public assets like highways, gas pipelines and railway tracks.
The meeting of the Council entrusted with enhancing co-ordination among financial sector regulators — RBI, SEBI, IRDA and PFRDA — assumes significance after the government unveiled the National Monetisation Pipeline (NMP) listing assets across sectors that are to be monetised for an estimated ₹5.96 lakh crore over four years.
With the economy still not out of the woods from the COVID-19 pandemic and Ms. Sitharaman urging industry to look beyond banks and tap the markets for their financing needs, steps to ease access and encourage investments in the corporate bond market are also expected to be discussed by the FSDC.
“An FSDC meeting has been planned for some time, and it will be convened very soon,” a top Finance Ministry official said.
The NITI Aayog, which has steered the NMP, has emphasised the importance of expanding the investor base and scale of monetisation instruments like InvITs and Real Estate Investment Trusts (REITs), and flagged concerns about regulators taking varying stances on such investments.
Measures announced in the Union Budget to enable InvITs and REITs to borrow money from FPIs and issue debt securities are also expected to be reviewed by the FSDC, along with the efficacy of changes implemented by individual regulators.
Sebi, for instance, has recently reduced the minimum investment amount for InvITs and REITs to ₹10,000-₹15,000 to enable retail investors to participate. The Pension Fund Regulatory and Development Authority (PFRDA) as well as the Employees’ Provident Fund Organisation (EPFO) have permitted investments of upto 5% of their corpus in InvITs, albeit with onerous conditions.
“The long-term nature of infrastructure projects requires active participation from investors looking at a similar return profile from their investments. However, the existing investment guidelines for insurance and pension funds limit the exposure of such funds to InvIT/ REIT assets,” the NITI Aayog has flagged in its guidebook for the NMP.
For insurers, the Insurance Regulatory and Development Authority (IRDA) has allowed an exposure to InvITs and REITs up to 3% of their own funds size or 5% of the units issued by a single trust, whichever is lower. Mutual funds, regulated by the stock market watchdog Sebi can invest up to 10% of their assets in a single InvIT/ REIT.
“These need to be streamlined to ensure consistency,” the Aayog has noted, besides highlighting inconsistencies across categories on the level of exposures.
“For example: IRDA regulations do not permit investment of insurance funds in unlisted InvITs. Hence, a staggered approach for streamlining of investment guidelines and limits is envisaged to keep pace with the growth in the InvIT market starting with the allocation of insurance and pension funds towards unlisted InvITs,” it said.
IRDA and PFRDA also mandate a high credit rating for InvITs to be eligible for their long-term investments, and the credit enhancement mechanisms for boosting the usually lower ratings of infrastructure projects may also figure in the FSDC’s deliberations.
A Credit Enhancement Guarantee Corporation, announced in the Union Budget of 2019, is not yet operational, while a partial credit guarantee enhancement scheme from the RBI has some limitations in its present form.
Restrictions pertaining to investments in the overall corporate bond market are also likely to be flagged at the FSDC, with Sebi recently mooting an urgent rethink from the Reserve Bank of India, IRDA and PFRDA on norms constricting debt market exposures, in order to enable a quicker economic recovery.
While there are multiple players in the debt market, the number of participants in each investor class remains limited due to such norms, constraining the pool of liquidity available, Sebi whole time member Ananta Barua had said at a capital markets conference last month.