Though the liberalisation of FIIs norms in May this year by Sebi was long overdue, granting sovereign wealth funds (SWFs) more freedom to register themselves as foreign portfolio investors has come with riders. In August, A high-level official panel on financial markets has asked RBI and Sebi to scrutinise data of SWF investments through FDI and FII routes and share it with the government. The panel has also decided to close the gap in data collection relating to indirect investments by SWFs through the FII/sub-account routes.
Some top global SWFs have been operating in India before May?s regulatory amendments, and they include Abu Dhabi Investment Authority (ADIA) ? the biggest SWF in the world ? Kuwait Investment Authority, and Singapore Investment Corporation and Tamasek, also from Singapore. Since May, a slew of SWFs, including China Investment Corporation (CIC) and Saudi Arabia?s fund, has sought Sebi approval to register and invest in the Indian stock market. They could significantly ratchet up the markets which have witnessed a dramatic outflow of foreign portfolio investment since the beginning of the year.
Across nations, official responses mirror concerns about investment practices of SWFs. In March, the Treasury Department reached agreements with the Abu Dhabi emirate and Singapore governments on a set of policy principles that would guide investment in the US. European Commission president Jose Manuel Barroso fumed in February that the EU could not allow non-European funds to be ?run in an opaque manner or used as an implement of geopolitical strategy?. A month before, at the World Economic Forum in Davos, influential speakers like Larry Summers fretted that foreign governments should agree to a code of conduct and be more transparent.
Nevertheless, these concerns seem far cry from the angst that went before in the West.
In 2005, Chinese National Offshore Oil Corp?s aborted takeover bid of Unocal ran into stiff resistance in US Congress and media where the Chinese offer was painted as a threat to America?s market economy. In the following year, Dubai Ports was prevented from taking control of the management of six American ports on the grounds of national security. The edifying lesson: in a huge takeover game, there?s a great deal of not only economic but also political due diligence need to be done before anything is even attempted in sensitive markets.
Fast forward to 2008. As the West?s banking giants groaned under massive writedowns as ill-advised speculation saw their assets shrink massively in value by the subprime mortgage crisis in the US, the origin of the money didn?t matter much as long as it bails them out. The less-edifying lesson here: business needs often neutralise politics.
When the writedown trickle turned into a torrent, those who saved the skin of these supposedly stable banks were SWFs. CIC injected $5 billion into Merrill Lynch to shore up its capital base. The ADIA, of Dubai?s sister emirate, took a $7.5 billion stake in Citigroup. The Qatar Investment Authority ploughed $3.3 billion into Barclays. Singapore Investment Corp of invested $11 billion into UBS, while Tamasek Holdings poured $5 billion into Morgan Stanley?s coffers.
There is no agreed definition of SWFs, but they are generally referred to as the investment arms of foreign governments. Their scale is staggering. According to the IMF, they are worth $3 trillion now, a figure that may top $12 trillion by 2015.
Though some of them were set up in early 1950s, it was not until the 2000s that their clout and spread increased manifold. Across the Middle East, the dizzying rise in oil prices has fuelled a windfall of surplus money while in East Asia, export-led growth has reaped a bonanza of foreign currency reserves. What better way to maximise the returns on surplus money than channel a portion of it to invest in free markets?
To be sure, SWFs are a valuable source of international credit. However, since government and moneymaking doesn?t mix well, doubts have arisen that their investment comes with strings attached to strategic national interests. These concerns are heightened when countries like Russia, which has a record of manipulating natural gas supplies to Europe to promote its political interests, launch, as it did in February this year, an SWF. And what about funds from the Chinese government, which has no compunction to support some of the odious regimes in the world? If the idea that state-backed funds should buy equity in listed private companies, for instance, disconcerts economic liberals, the thought of these many secretive, opaquely-run funds buying into vital national assets increasingly worry regulators.
There are few signs that SWFs are being used as a foreign policy tool. Yet, in a stark reminder of SWFs? ascendancy and the IMF?s irrelevance, the former have balked at signing up to a code of conduct the latter is devising. OECD is also working on a parallel track. SWFs are rankled by the US and EU-prodded moves to single them out when other investors such as private equity and hedge funds remain not bound by cohesive international regulation. In fact, if the SWFs refuse to budge, there is little Western powers can do. Definitely not when credit crunch and high commodity prices are in vogue.
That SWFs have become a fact of international finance is evident. What is less apparent are transparent rules governing them. Business may yet neutralise politics. But the dictum ?trust but verify?, applies here, too.
?rajiv.jayaram@expressindia.com