In contrast to the conventional sovereign wealth fund (SWF) traditionally floated by rich economies, India is looking at floating a new company — the India Overseas Investment Corp Ltd (INOIC) — that will invest in the ownership of natural resources assets overseas to create long-term resource security without drawing on the forex reserves that will continue to be managed by the Reserve Bank of India.
Hindustan Times had first reported on December 12, 2012 that India is looking to launch its own SWF.
“INOIC will not be India’s SWF in the conventional sense but will be a development finance institution with the specific mandate to provide equity and debt to Indian public sector enterprises (PSEs) for securing natural resources abroad,” said a senior government official associated with the process.
INOIC will use surpluses available with public sector units to acquire foreign exchange from the RBI at market-related rates for purchasing overseas assets.
This model, according to officials, would defy all the usual constraints of a high current account deficit (CAD) and fiscal deficit, large external debt, large forex reserves, absence of high commodity export earnings, which have so far prevented setting up of an SWF.
“INOIC will need not borrow from the RBI unlike IIFCL....this new company will purchase or swap its rupee funds with foreign currency from the RBI at market-related rates,” officials said, adding, the rupee funds will be mobilised through the issue of long-term bonds.
It is proposed that the foreign exchange required by INOIC would be acquired from the RBI through outright purchases on a spot basis or medium-term currency swap.
“The mechanism is thus market-oriented and will also avoid management of temporary surplus foreign currency funds, necessitated in the IIFCL model.” According to a concept note of the Department of Economic Affairs, the justification for setting up an entity like the INOIC is the need to accelerate infrastructure development and economic growth, which requires steps to be taken to ensure energy security in the form of ready access to natural resources such as oil and gas and coal.