All about sovereign wealth funds
It will aid resource mobilisation and big-ticket natural resource acquisitions. But will it really help meet India’s energy security goals? Anupama Airy reports.business Updated: Dec 19, 2012 02:04 IST
Aimed at acquiring big-ticket natural resources abroad, the creation of a Sovereign Wealth Fund (SWF) for India has been under the consideration of the finance ministry since 2008. In principle, the proposal to set up a SWF was cleared by a group of ministers on October 13, 2011, after which the matter came up for discussion during a recent meeting in the Prime Minister’s Office.
After detailed deliberations, the government is now of the view that it may be prudent to rework the concept with greater focus on mobilising resources from within, including public sector undertakings, by creating an attractive instrument of investment.
HT takes a closer dig on the process of setting up a SWF and nations that already have such a fund.
What is a SWF?
SWF is defined as a special purpose investment funds or arrangements, owned by the Central government and created for macroeconomic purposes. SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies includind investments in foreign financial assets. There are more than 30 such funds in the world.
How are these funds established?
SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, fiscal surpluses, and/or receipts resulting from commodity exports. According to a recent study by the Planning Commission, SWFs have been mostly created by the exporters of oil and gas, copper, diamonds, phosphates and other minerals, as well as by countries with persistent and large current account surpluses. However, there are instances where SWF have been set up by countries that do not have a history of persistent current account surpluses and have been set up for somewhat diverse objectives.
What is the purpose of setting up a SWF?
SWFs are a way to improve the country’s finances as well as hedge against future crises and are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.
What are the government’s plans on setting up a SWF?
The matter regarding setting up of a SWF for India has been under the consideration of the finance ministry since 2008. During its meeting held on October 13, 2011, the group of ministers set up to provide guidance on coordinating external interface on matters related to energy security deliberated upon the need to create a SWF, and agreed, in principle, to set up a SWF. Recently, the Planning Commission had submitted a proposal for the creation of a strategic energy fund for the consideration of the group of ministers (GoM) to provide guidance after a study of major SWFs based in different countries. In this proposal, various SWFs were studied with respect to the sources of financing and objectives of these funds.
What is the progress on creating an India-specific SWF?
India is all set to join an elite club of 30 nations that have SWFs, and plans to do so by dipping into the cash surpluses of public sector companies, estimated to be around R2.5 lakh crore, in addition to using a small chunk of foreign exchange reserves. Details of the fund are still being stitched up and one option being considered is to create special instruments that public sector companies can invest in, and use the funds raised from them to shop overseas for natural resources. The Indian government has proposed the creation of a country-specific SWF by digging into the cash surpluses of PSUs.
What kind of forex reserves will be deployed in this fund by India?
The Planning Commission is of the view that 2- 5 % of the country’s current foreign exchange reserves should be deployed for creation of the SWF. Government sources said the Planning Commission has told the GoM that deploying such a quantum of forex reserves will not pose any problems to India’s balance of payments status and should be done to meet the country’s energy security goals.
What are the views of the finance ministry on creating the corpus of SWF?
The Department of Economic Affairs feels that it may be prudent to rework the concept with focus on mobilising resources from within, including PSUs, by creating an attractive instrument of investment.
Which countries have an SWF?
Abu Dhabi, Norway, Yemen, Qatar, Saudi Arabia, China, Russia and Singapore are some countries successfully using this instrument. Abu Dhabi has the biggest such fund, with over $600 billion being managed. Norway has a “fund of funds” of sorts; it helps other countries invest their money.
How is China using its SWF?
China, which already has a SWF, has heavily invested in Africa, Caspian and other regions to acquire energy assets, which is helping it to reduce its dependence on imports and counter the growing pressures of steep increase in the prices of energy resources especially coal and oil and gas. China has also bought up 10% of American Blackstone Group for $3 billion with money from its SWF.