Column : Tapping SWF potential in India

Written by Shefali Dhingra | Anuradha Guru | Anuradha Guru | Updated: Sep 26 2012, 08:38am hrs
Acceleration of growth in India is critically dependent on raising the rate of investment in the economy. This was, inter alia, emphasised by the Prime Minister Manmohan Singh in his statement at the Full Planning Commission meeting on the Twelfth Five Year Plan on September 15, 2012. The Prime Minister also stated that because export performance is likely to be weak, a high growth, high investment strategy will require financing a current account deficit of about 2.9% of GDP. This must be financed mainly through FDI and FII flows, so that reliance on external debt is limited.

FII flows have significantly grown in importance over the years. Several steps have been taken by policymakers to continuously enhance their investment limits in the equity as well as debt markets over time. Continuing with its aim of widening the class of investors, attracting more foreign funds and reducing market volatility, registered mutual funds were permitted to accept subscriptions for equity schemes from foreign investors who meet the KYC requirements. Further, Qualified Foreign Investors (QFIs) have recently been allowed to directly invest in Indian equity markets.

An important potential source of foreign capital, which has not been tapped in a direct manner as yet, could be Sovereign Wealth Funds (SWFs). Currently, these funds are investing in India through the FII route. Existing provisions in regard to due diligence and take-over code are applicable to them as to all FII investors. Further, as per the finance ministry press release dated June 25, 2012, SWFs have been recognised as long-term investors and have been allowed to invest in government of India securities up to the enhanced limit of $20 billion. However, there is no separate regulatory regime (like that for QFIs) to specifically address investments by SWFs. Currently, only a few SWFs are registered as FIIs in India. An indicative list of these SWFs along with their country of origin, total assets under management and transparency index can be seen in the table. There is lot of potential for India to be able to attract more SWFs, provided we can put in place a policy framework conducive for them.

According to data available with the SWF institute, these funds have grown in size from a corpus of $3.27 trillion in September 2007 to $5.12 trillion in September 2012 (see graph). Thus, they are fast becoming a significant investor category to reckon with within the institutional investor landscape. This growth in their assets has been fuelled by rising foreign exchange reserves and rising commodity prices, which are the main source of their corpus. Recent years have also seen a number of new SWFs being set up and a few more are in the offing (for example, Japan, Iceland and Bolivia). Further, given the growth dynamics behind these state funds, analysts believe that volumes of such entities are likely to see enormous growth in the years to come.

There are concerns over SWF investments in host countries. These primarily arise from the widespread belief that state involvement necessarily implies that they would act in the interest of maximising their home countrys strategic interests rather than pursue pure profit maximising objectives. However, empirical studies argue that SWFs are long-term investors that rarely take controlling stakes in the companies of host countries. They have been instrumental in offsetting global financial and economic imbalances and have been seen to provide liquidity. They have also served as contrarian investors, supporting global markets in times of financial stress. A notable example of this is the fact that SWFs made huge investments into subprime crisis-stricken financial sector institutions in the US and Europe. More recently, in the context of the eurozone debt crisis, a suggestion that SWFs could provide corpus for the European Financial Stability Facility has been made. Further, the International Working Group on Sovereign Wealth Funds, facilitated and coordinated by the IMF, has put in place what are called the Santiago Principles. These are a set of voluntary codes for SWFs providing for their greater public disclosures, transparency and accountability. Though Santiago Principles are not legally binding, according to the International Forum of Sovereign Wealth Funds, all members of the forum are committed to the application of the Santiago Principles. They value the benefits from the voluntary principles as helping them in reinforcing their domestic and international standing, and having a positive impact on their reputations.

According to the Monitor Group Report, India became an increasingly important investment destination for SWFs in 2010, with investments flowing into Indias electricity transmission and healthcare sectors. India is one of the BRICS economies that have weathered the global financial crisis well. Despite the 2008 subprime crisis and the 2011 eurozone crisis, India achieved an average growth rate of 7.9% during the Eleventh Five Year Plan Period (2007-12). Apart from good growth prospects supported by on-going economic liberalisation and strong domestic demand, Indias strengths lie in a stable financial system as well as vibrant, transparent and high returns yielding capital markets. All this adds to India being considered as an attractive investment destination by SWFs. We, as host country for them, could benefit from their relatively stable and long-term investments, as compared to those by hedge funds or even institutional portfolio investors. It is also believed that their investments could curb volatility and deepen the Indian capital markets.

In the light of the above, it is felt that there is a need to actively explore ways to further encourage SWF investments in Indian financial markets.

The authors belong to the Indian Economic Service. Views are personal