Tokyo/New Delhi: India’s $2.3 trillion equity market has surged in recent years, and is about to get a new endorsement—from the nation’s pension regulator.

“We are pressing the government to increase the equity proportion for government employees, and expect a favourable response very soon," from the finance ministry, Hemant Contractor, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), said in an interview in New Delhi Friday. The PFRDA has called for a bump to 50%, matching the maximum for private-sector pensions overseen by its National Pension System (NPS) arm.

India’s equity culture may also get a boost from a stewardship code to be rolled out for the country’s fund managers to push for corporate-governance best practices. The PFRDA, along with India’s insurance and securities regulators, is pursuing the new code, Contractor said.

Contractor, who’s headed the pension regulator since 2014, said the new code will help improve the professionalism of business management, with challenges ranging from the misuse of corporate funds to boards taking insufficient action when things go wrong.

Government employees contribute about 87% of the 2.3 trillion rupees ($35 billion) overseen by the NPS, which started in 2004 and later opened to all citizens for voluntary contributions. Aside from the NPS, the government operates the Employees’ Provident Fund Organization (EPFO), which offers investors defined returns on savings. Contractor said his agency has pressed for legislation allowing workers to shift from that plan to the NPS.

With interest rates trending lower, “equities, if managed properly, should provide that extra bit" of return, Contractor said. There’s great appetite for putting money in stocks, and one proposal under consideration is to boost the limit for non-government subscribers to 75%, he said, adding that the strategy does carry risk.

Pension funds from Japan to Australia have taken on greater risk over time, conferring increased volatility. Norway’s sovereign wealth fund said 27 April it lost $21 billion in the first quarter thanks to the global sell-off in equities. In India, appetite for risk may be less in a country where the 1.3 billion population doesn’t have social security coverage, and where savings have declined as a share of the economy from a peak a decade ago.

But with risk comes the potential for outsized gains. After returning less than bonds in 2016 and a loss in 2015, India’s NSE Nifty 50 Index of equities had a 31% total return in rupee terms in 2017, compared with the 3.1% on Indian government bonds according to ICE Bank of America Merrill Lynch data.

Contractor saw less need to expand the cap on investment in corporate bonds, which is currently set at 40% of the portfolio. He said there’s just not enough issuance in the market to make it more attractive. He also ruled out investing in overseas markets for some time to come, given the likelihood of better returns at home. Bloomberg

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