Is India Ready for Sovereign Wealth Funds?


Can India boast of any preparedness to give wings to a proposal to establish its very own Sovereign Wealth Fund ? The reactions to this question vary from emphatic agreement to vehement opposition. The question has been on many minds. It's been the talk around town, the objet de ragots of the intellectual circles; and not without merit. Everyone - from economic analysts to RBI spokespersons, from class room students to the Finance Minister - everyone has their own take on the matter.

Everyone else seems to be doing it. UAE has the Mubadala, Singapore has the Temasek and China has the China Investment Corporation. 17 such SWFs have come up in the last 4 years alone. Predictions place their purchasing power at approx. US $15 trillion by 2015. SWFs are here and they are making themselves count. Then, why is it that India is sitting out on the action?

In the midst of this contemporary debate is a lesser heard, yet incisive, opinion - but, aren't we there already? However, we shall put this argument to the test at a later stage. For now, it suffices to say that the deliberations have brought to the fore a wide array of intriguing challenges.

Analysts, arguing fastidiously from both sides, have taken great pains in contributing towards what exists today as a heap of literature on this issue, albeit predominantly of the paper-less kind. To add flavor to the discussion, rumors abound that the Indian decision makers have, in fact, been seriously contemplating floating such an enterprise. Nonetheless, the question remains - even if a SWF based on Indian soil is on the horizon; is India sufficiently equipped to handle this 20th century global phenomenon which seem to have a knack of remaining embroiled in political controversy?

An answer to this query would necessarily entail two parallel issues. Firstly, all factors considered, is India capable of venturing into the league of those nations which operate SWFs? Secondly, do Indian laws and regulations have the potential to adequately regulate the outgoing investments from India and the incoming investments from other SWFs?

The bulk of this essay shall analyze the first of these issues, for it has attracted a much wider and divergent assortment of viewpoints. In its span, the essay shall examine some of the most fundamental questions which have proved to be the most contentious. After looking at “The When?”, i.e. at what point of time should a sovereign turn towards SWFs as tools of economic and strategic development, it shall present a study closer home, “Is India ‘There' Yet?”. Going beyond, we shall consider “The Why?” which shall consist of the quintessential arguments put forth by those who voice support for the assertion that India should consider setting up a SWF, and the “Why Not?” which shall argue against such a conclusion. Using the findings to the above queries as a foundation, the remainder of the essay shall present a model for a possible course of action for India in the coming years.

The “When” - Sovereign Wealth Funds & the Common Wisdom

While there are a multitude of reasons why countries around the world establish SWFs, the unsaid rule which dictates their creation is the existence of excessive surpluses in the coffers of the initiating nation. Also, it is interesting to note that a SWF is defined more so by the source of its funds than by the targets that such a fund seeks to acquire. SWFs usually consist of balance of payment surpluses, other fiscal surpluses, official foreign currency operations, proceedings of domestic privatization, receipts from commodity exports, etc.

It is not by mere coincidence that the countries which have made vigorous forays into SWFs can be categorized as either oil-rich nations or profiteers of commodity exchanges. As the story goes, nations which had gained excessively during the oil-boom years and from trade activities sought to diversify their investment portfolios. Since their economies were heavily dependent upon either oil production or commodity exchange, those investments which offered their economies protection against adverse events (such as international trade price fluctuations) were the obvious choice for them to utilize their excessive reserves. Soon enough, with the success of this investment model and the discovery of other strategic benefits which were accrued on to the SWF nations, the trend caught along.

This shapes our understanding of what constitute the preferred prerequisites for when any country looks to give impetus to its SWF program. In particular, a correlation can be drawn between heavy investment into SWFs in those years in which there were exceptionally high earnings from oil and gas production and/or there was sizeable liquidity created on account of exports. Foremost examples of SWFs constituted out of surpluses from oil and gas exports include countries like Saudi Arabia, Abu Dhabi, Norway, Kuwait and Russia.

It must be noted that this does not preclude non-oil and non-commodity rich nations from indulging in SWFs. Several countries, such as China and Singapore, have invested in SWFs after recording year on year accumulation to their reserves through non-oil and non-commodity fiscal surpluses.

Experiences in these nations suggest that governments show an inclination towards creating SWFs at times where budgetary surpluses are excessive or when there is negligible international debt or the same has at least been reasonably curtailed.

Therefore, it is safe to assume that more than anything else it is the accumulation of a buffer-stock of reserves from fiscal surpluses which determines the ‘right' time for any country to set up a SWF.

Is India ‘There' Yet?

The aforementioned criterion represents an informal, yet precise, account of most of the SWFs which control nearly US $4 trillion in the global economy today. To ascertain whether such a model can be replicated in India, we would need to examine several domestic as well as international fiscal and non-fiscal factors which would come in to play along with a cost-benefit analysis of executing such a program.

For the sake of our convenience, we may divide these factors into two categories - those which would influence us to conclude that India is not prepared for SWFs since the possible repercussions of implementing such a program would prove to be detrimental to our interests, and those which place the gains from such implementation at a considerably higher pedestal than the collateral expenses which would be incurred.

Part I: The “Why Not” - IndiaIsn't Ready for a Sovereign Wealth Fund

(i) Our Reserves: What Do They Really Represent?

India currently faces the highest fiscal deficit it has recorded in the past decade and a half - a staggering 6.8%.While it is reassuring to think of our reserves in terms of their current value, which stands at over US $270 billion,this figure betrays the truth of what it actually represents. Unlike most other countries, India's reserves do not represent its actual net savings. Instead, these reserves merely reflect the surplus of capital inflows over its current account deficits.They are in the form of extra-commercial borrowings, or portfolio investment inflows. In actuality, these reserves are either debts which need to be paid back, or funds which may flow out of India at a moment's notice.

Even if the current reserves could be put aside for SWF investment, there is little confidence that the current growth rate of our surpluses can be maintained. This implies that, over time, not only would our reserves be unfit for diversion for a SWF, but it would become costlier to maintain the same level of the reserves.

Therefore, we face a situation dissimilar to the ‘traditional' SWF investing countries - we do not have surpluses in our reserves which we can invest! A move to divert these funds from these reserves to form a SWF would be fraught with danger since it could prove to be disastrous in the event of a need to liquefy the reserves.

(ii) Risky Investments vs. Safe Bets: Assessing India's Risk Appetite

Currently, the RBI is entrusted with the responsibility of handling India's reserves. These reserves are invested in the US treasury bills, which result in relatively low yields but are acknowledged as safe investments. This also reflects on India's risk appetite. SWFs are generally considered to have an affinity for risky and potentially high yielding investments. This aspect becomes even more highlighted in the light of the current post-crisis effect looming over the uncertain and volatile markets.

Furthermore, in the absence of cautious planning, withdrawing vast sums of Indian investments from the US treasury may pave the way for further volatility in the global economy. This would also translate into the reduction of India's export competitiveness since the current reserves ensure that an appropriate level of currency prices is sustained.

(iii) The Institutional Bend: A System of Inherent Risk Aversion

The management of our current reserves is the function of a complex system of checks and balances. This system, in several ways, exerts an inherent pressure which is biased against making risky investments. Given this fact, would it be possible for an Indian origin SWF to break lose of these shackles to make unclouded judgments as to where the SWF would make its investments? Or would such investments prove to be far too adventurous for our taste? For instance, who is to say that even after a SWF is established, the investments would not be channeled to the same low-yield, high-safety assets through the nugatory effect of these internal pressures?

(iv) The Times -They Are A Changing: The Post Recession ‘Blues'

It has been opined that since the market situations have considerably improved over the recent months, India should look to take advantage of a short window of opportunity to set up a SWF and acquire assets at inexpensive rates.

However, it must be borne in mind that Indian companies have fared exceedingly well over the past couple of quarters, bettering expectations, because of a combination of various stimulus packages made available to them. On the other hand, the current fiscal deficit, a trade deficit of over US $70 billion, an external debt of nearly US $200 billion, surging oil prices and the spiking inflation levels are indicative of the real situation which, on the whole, is far from favorable.

Therefore, despite a promising market performance, SWFs may prove to be far less yielding than expected, or may have longer gestation period for maturity. The question then is - can India afford to gamble its reserves on such an unsure bet? Or, would Indian have the luxury to patiently wait for these investments to mature? Furthermore, in the recent past, other SWFs have recorded negative growth (Norway, 1st quarter of 2009, -4.8%) and have incurred mammoth losses. A comprehensive risk assessment is, therefore, not only advisable but, in fact, necessary prior to the formulation of any concrete SWF policy.

(v)The Realities of Sovereign Boundaries & Cross-Border Politics

SWFs offer certain non-economic benefits on the side platter. These include the ‘strategic' edge that they provide to a sovereign through its overseas economic influence. However, such influence is often aggressively resisted by local governments and politicians - sometimes in a state of frenzy, despite bonafide motives of the investors.

In the aftermath of 9/11, an offer to acquire an American port-operating company by a fund stationed in Dubai was subjected to strict political resistance, as was an offer by China to takeover an American oil company. These cases exposed the vulnerability of overseas transactions to the will of the local politicians. It also raises the question of certainty - how safe and ‘certain' are SWF investments from turbulence in the local political establishment?SWF investments are usually characterized by voluminous transactions. The case of Hugo Chavez canceling Exxon Mobil's contracts demonstrated the potential hazards that such transactions could face in situations of friction with the local government.

(vi) Management & the Lessons Learnt Thus Far: Pleading for Accountability

Several issues related to the management of the SWF crop up, which primarily include, but are not restricted to, the potential interference with the decision making of the SWF. These impediments may be direct or indirect in nature. SWFs have faced the heaviest criticism for being perceived as intimidating and unaccountable enterprises, which are likely to skirt regulatory and transparency frameworks. Unless the highest standards of transparency and accountability are maintained, the discretionary powers conferred upon the SWF may result in an abusive situation wherein vested interests may reign supreme.

On the other hand, if mechanisms which are put in place to restrict such arbitrary decision-making are allowed to gain a choke-hold on these powers, a lack of independence given to the management would also lead to a detrimental situation drastically reducing the potential benefits from the SWF.

Since India has battled problems with opaqueness and distrust in the sphere of governance, we are more than just acquainted with these troubles. This explains the relatively low enthusiasm on the level of accountability that can be expected from an Indian SWF. Unless a fine balance can be maintained to ensure adequate implementation of the established principles of good governance, such as the Santiago Principles,the principles enumerated in the Linaburg-Maduell Index,and by borrowing a leaf from the books of seasoned SWFs such as the Norwegian model in addition to drawing from India's past experiences with such problems, the very purpose behind the SWF would stand to be defeated.

Lastly, who would be entrusted with the responsibility to manage the affairs of the SWF? Even though the RBI, which is the top monetary regulator in the country, may be lauded for its past efforts and achievements, the fact remains that the body could make do with an internal boost for better efficiency and infrastructure. In dealing with the complexities of India's regulatory demands, does the RBI not already have enough on its plate? Wouldn't the RBI efforts be best directed towards ensuring the smooth functioning of its existing mandates than the imposition of additional duties of regulating a SWF?

(vii) Domestic Needsvs. Overseas Projects: Quenching Whose Thirst First?

Another very important aspect regarding the setting up of SWFs is that these funds are normally set up in countries which do not have challenging domestic needs. In other words, a poverty struck country like India setting up a SWF is, at best, unusual.

India, at the moment, faces various domestic challenges and would need to divert its attention inwards and give a higher priority to the problems of poverty, infrastructure development, fiscal deficits and other developmental projects for which heavy doses of investment are desired. In the backdrop of these requirements, should India's reserves be utilized for the purpose of yielding higher returns or quenching its thirst for development?

The same argument may be looked at from the point of equity. Bettering returns on investments is likely to affect only a handful of Indian citizens, depending upon the manner in which these returns are distributed between the citizens. On the other hand, by focusing on the pressing domestic needs, India would further its mandate as a welfare state and benefit its citizens, across the board, in an equitable fashion.

(viii) The Grey Areas: SWFs & Regulations

SWFs are a recent phenomenon. Although SWFs can be traced back to the early 1950s, they did not acquire their current shape, structure and dominance in the international financial markets until much later. In fact, the term “sovereign wealth fund” gained usage as late as half a decade into the 21st century. While much of the debate circulating around SWFs has dealt with their financial, political and strategic prowess, little is known about their interaction with law and policy.

Law and policy, true to the dynamism which binds them to the society, have recently taken cognizance of these developments and regulatory frameworks are being erected to tackle some inherent problems with these funds. For instance, the very nature of the investor in these transactions may open up a few issues to debate.

Since a SWF does not possess a legal personality distinct from the State, the question of State Immunity crops up. In such cases, what begs attention is the ‘commercial' nature of the transactions.Under the UN Convention on Jurisdictional Immunities of States and Their Property, which codifies the customary international law relating to State immunities, the defence of State immunity may not be available to a State if the activities undertaken are of a commercial nature or relate to the participation of the State in a company. This is also reflected in other international conventions, such as Article 6 of the EU Convention on State Immunity.

While the principles of sovereign immunity may be better situated to tackle with jurisdictional problems related with SWFs, the possibility of the investor altering the ordinary course of business in the host economy poses regulatory threats.

Moreover, the persuasive effect of the SWFs is almost always much larger than what meets the eye - because while a country may have invested only a fraction of its reserves in its SWF, it may enjoy far more diplomatic and financial clout than the mere quantity of reserves controlled by its SWF. Also, the principles of governance which have been evolved - such as the Santiago Principles, only make such norms voluntary, and not binding, upon a given SWF.

In the absence of clearly defined regulations which take them into account,SWFs may be able to slip through the cracks in the existing legal framework. Therefore, this is a crucial point interface between SWFs and the law which needs careful examination - for outgoing, as well as incoming investment.

As for an Indian origin SWF is concerned, due care must be taken in ensuring that the investments are free from potential hurdles which may threaten to restrict their scope or tie them up in unnecessary conflict or expose our investments to more risk than anticipated.

At the receiving end, SEBI and RBI have put in effect adequate measures for foreign SWFs (which are treated as Foreign Institutional Investors) and must continue to remain vigilant about the motives behind the investments. However, the tendency to over-regulate such investments must be resisted to ensure that the enthusiasm of the foreign SWFs is not driven away.

A Tentative Conclusion: Too Soon To Draw?

In view of the eight broad arguments elucidated above, the natural conclusion which can be reached at this point is obvious - certainly, India is not prepared to taken on the challenges posed by SWFs. Not yet, anyways. However, that is only one side of this curious debate. The forthcoming section of the essay shall take up the counter-arguments, which make an attempt at persuading the reader otherwise.

Part II: The ‘Why' - IndiaIs Ready for a Sovereign Wealth Fund

(i) The Times - They Are a Changing: The Post-Recession ‘Groove'

In response to a conservative approach to SWFs which put forward the view that the current market scenario, clubbed with India's budgetary constraints which limit the losses that it can afford to take on its investments, it must be noted that with cautious planning and execution, the situation could work to India's advantage. This is so because despite the constraints which may limit an allocation for the SWF, India finds itself ready to take on this porthole of an opportunity to obtain assets, which may otherwise be expensive, despite a shoestring budget.However, this would not justify unnecessarily high investments, say - more than a mere fraction of its US $270 billion reserves, in extremely risk-prone assets without scrutiny. So long as these requirements can be fulfilled, India would be in a position to sit out and patiently wait for the investments to bear returns.

(ii) India's Current Financial Restraints: What Do They Really ‘Restrain' Us From?

Admittedly, our reserves may not exhibit true savings. However, this does not prevent us from managing these reserves to the best of their potential.Analysts even argue that given the size of the Indian economy, its balance of payment and trade deficits are stable.Moreover, India figured in the list of countries with the most accumulated reserves. There is absolutely no dispute over the fact that our reserves have crossed over to the excessive grade.

With a fractional fund earmarked for a SWF, India can start a relatively smaller SWF, say to the tune of US $5-US $10 billion, with minimal to no threat to its economy. With the subsequent returns from SWF investments over the next few years, India can move towards reducing its fiscal deficit. However, what shall be most interesting would be that since this would also be the teething period for an Indian SWF, this phase could be effectively used as a benchmark of knowledge gathering and practicing for the purposes of our future endeavors in SWF investments - which could then focus on bigger investments.

(iii) Strategic Investments -A Gain inExchange

Globally, SWFs have come to be regarded as incredibility useful tools of non-economic value creation, which can then be used to create opportunities for economic and other benefits. Investments through SWFs are often used subserviently to fulfill the objectives of a wider economic and/or political strategy of a country.

For instance, an investment made using a SWF can further economic relations between the host and the investor country, and can be translated into mutually beneficial terms of development. This was seen in the case of Temasek's recent investment in the Indian banking sector. Temasek Holdings, one of Singapore's two SWFs and estimated at US $122 billion, invested in the Indian bank, ICICI. This investment strengthened the trust and the financial relationship between the two countries.

There has been global skepticism over the motives behind acquisitions by several SWFs. These apprehensions are further fueled by the lack of transparency in the operations of many SWFs. Countries like France and Germany have gone on record in their protest against such operations.

However ruthless such actions may appear, the reaction of the global community furnishes evidence of what we've already known - SWFs successfully transfer strategic advantages across borders. In the day and age of globalization, when the focus has shifted on to India as a burgeoning world-power, can India afford to sit out and overlook such strategic affairs?

As a by-product of setting up an Indian SWF, there would be other associated strategic gains as well. Since the creation of the SWF would necessarily entail the foundation of an independent body, on the lines of SEBI, to deal exclusively with SWFs, this body would undertake monitoring, management and regulatory functions as well. This would prove to be a strategic gain, since this body would be better equipped to monitor the incoming investments from foreign SWFs.

(iv) Mitigating Risks: Securing Future Needs & the All Eggs in One Basket Syndrome

The raison d'être of SWFs is their tendency to palliate investment risks along with creating higher yields from foreign exchange reserves.The yields on Indian investments in the US treasury bills are dismally low and with the dwindling dollar rate, the future of our investments looks bleak. Moreover, these current investments are riddled with inherent costs. The univocal investment advice for India would be to diversify its investments.

If India was to utilize a fraction of its investments, through SWFs, in, say, the energy sector, it would be a step in the right direction.The reasons are two-fold. Firstly, this would protect India's long term needs. Secondly, it would mitigate the risks attached with our single-target investment strategy.

With the opening up of the Indian economy, India is vulnerable to the fluctuations in the global markets. In the near future, instabilities such as a surge in the oil prices can seriously damage our economy. Therefore, investments which can down-play this threat must be viewed with optimism. On the other hand, with the dollar losing its world-dominance and the emergence of other global currencies, investments in the US treasury bills are not without risk either. It would make much sense in diversifying this investment to safeguard our economy, lest we expose ourselves to the risk of depleting reserves in the event of a falling dollar.

(v) Domestic vs. Abroad

As regard the issue of prioritizing investment into the investment thirsty domestic economy over economies abroad, the answer would lie in balancing the two investments by weighing their respective investment potential. This essentially means investments overseas must be considered if they are financially more appealing. A blanket-ban policy to needlessly restrict all our investments within India is a two-edged sword, as explained below.

It is estimated that India requires nearly US $500 billion to bolster its domestic infrastructure and development projects. This requirement far exceeds what India is capable of self-financing. Therefore, it is without doubt that India needs to look at alternate sources of funding for these projects. This should dispel any misgivings about whether our reserves can be funneled to aid domestic growth. However, our reserves can be usefully deployed to create an atmosphere more conducive to domestic growth. Considering the sheer strength of our reserves, it is inconceivable why a fractional sum cannot be put aside for use in SWFs independent of our pursuit of developmental aspirations.

Since none of these arguments raise any doubts as to demonstrate that investing in a SWF would compel India to take anything away from domestic development, an investment equivalent to a marginal proportion of the reserves into SWFs may be acceptable. In fact, the returns from these investments can be cycled back into aiding domestic development.

(vi) Good Governance: The Way ‘Out' of Other Expected Problems?

Several of the associated concerns with SWF can be dealt with through an institutionalized system which imbibes an appropriate balance between autonomy and accountability. If all investments are made in adherence to the strictest norms of pre-investment assessment and are conducted in a manner which is laced with transparency and inspires confidence, almost all of the other claims of those who express reservations about India's readiness to take a plunge into a SWF can be satisfactorily redressed.

Tentative Conclusion: So, Is IndiaReady for SWFs?

A Sneak Peek: What May Come Next

Considering these six broad justifications, can we say with conviction that India is prepared to assume the liabilities and challenges which SWFs bring with them in tow? Perhaps, yes. But, this concurrence comes with a rider - that, a lot shall depend on the actual means of implementation of the SWFs in India. As far as inward directed SWF investments are concerned, we're already ‘there' and must continue to exhibit the same level of precaution that we have thus far. Since the investments made by SWFs are set to multiply over the years, it may be useful for us to reinforce our regulatory mechanism by setting up an altogether separate wing to look into SWF investments.

Coming to outward directed SWF investments, most certainly, there are numerous permutations and combinations involved in India launching its SWF; a variety of models which we can put to practice. The subsequent segment of the essay shall suggest a suitable model of implementation for India giving due regard to our level of preparedness and our existing frameworks.

Conclusion: so, what is the best policy forward?

India's SWF: Approach & Underlying Principles

India's maiden foray in to a SWF should adopt an eclectic approach and seek to incorporate the most fitting ‘tried and tested' operational models from around the world. Amongst them, the models developed by Norway and Singapore are likely to hold promise for India. Consistently ranked high on efficiency and transparency indices, these models are most appropriate in the Indian setting where opaqueness and accountability are likely to wither away the confidence from the SWF and increase the probability of abuse.

Even from a functional aspect, transparency with respect to the governance structures, the actual ‘owners', vital investment decision-makers, audit provisions, etc. are invaluable in building the domestic trust and an internationally projected face of any SWF. This, to a large extent, determines the success of the fund.

We find an acknowledgment of this fact in the recently established set of 24 principles which set the benchmark for all practice in the field - the Santiago Principles. The principles cover a wide range of areas which vary from - a supporting legal framework to correlation of SWF objectives with the country's macroeconomic goals; and from the tweaking of an institutional framework to setting up effectual governance structures. It also brings under its fold the investment and risk management framework for the funds.

Besides these principles, countries like Norway have framed specific ethical guidelines which translate into binding considerations while making investment decisions. As per these guidelines, prior to commitment of funds, recipients undergo a strict scrutiny by a council established for this purpose. If the council is convinced that going ahead with an investment in a potential recipient would be contrary to its ethical guidelines, it has the power to veto such a transaction.

Taking a cue from such vibrant developments in the field of SWFs world-over, India would enjoy the luxury of observing the successes and failures of other SWF set ups over the last five decades, of which it should pay close attention to detail over the last decade or so, while determining specific policy objectives and operational requirements.

The Funds

This brings us to the next issue - that of the specifics of the Indian SWF. A small fund, representing funds in the vicinity of, but not more than, 5% of India's reserves, should be sufficient for India to embark on its short-term SWF related objectives. With future accumulation of reserves, and depending upon the fiscal conditions over the coming years, India can divert more funds into this venture.

The Decision Makers & Other Specifics

But, who shall captain this ship? It is of utmost importance to fortify India's SWF from misdirected and unwarranted political interference. For this purpose, an autonomous body, akin to the RBI or SEBI, should be established pursuant to a Parliamentary enactment. The gravity of this need is further accentuated on a close examination of the mandate of the RBI under the RBI Act, 1934 which does not confer any powers upon the monetary regulator to invest outside of foreign government treasuries.

Once enacted, the law must lay down the procedure of appointment of decision-makers, safeguards against political interference, certain minimum standards of transparency, other confidence inspiring and accountability ensuring governance structures,procedures for systematic disclosures, etc. Preferably, this body should also regulate the incoming SWF investments in tandem with other regulatory bodies, along with an ethical and financial assessment of outgoing investments. It must possess the characteristics of a body which is State owned, but isnotState directed. We may refer to Singapore's model in Temasek: an incorporated body as a private company with a sole shareholder - the Ministry of Finance. A majority of the board of directors should be independent directors from the private sector, such as professional and experienced fund managers, who would necessarily need to approve the investment strategies.


This is, arguably, the trickiest of all questions. Where will the funds be invested? Will they look to capture markets abroad, or invest in the domestic sector as well? A major criticism leveled against the SWFs has been its inclination towards prioritizing overseas investments over similar domestic projects.

India's SWF should look at both - domestic and foreign assets. The decisions should be weighed primarily on the investment potential of the assets, and wherever an equal opportunity exists, preference must be given to domestic investment. However, we would need to exercise caution as to not ‘dictate' such terms to the SWF - whether through statutorily incorporated instructions or through political pressures. Instead, the decision should be left at the discretion of the fund managers, with a recommendation in the fund guidelines to this effect.

In order to forge friendly and progressive economic relationships with nations and to avoid international frictions at a time when SWF activities are viewed by host countries with extreme paranoia, India must ensure that its investments in foreign assets do not exceed a prescribed maximum limit, of say 1 - 2%, of ownership.

Clarity in its investment objectives would go a long way in ensuring that our fund does not succumb to the ‘lab rat syndrome' of frequent experimentation. Like other countries, such as the USA, a detailed, yet broad, account of the purpose and strategies must be laid out.

Singapore's model has another lesson for India to learn from - that of ‘suggested' quota allocations. That is, the objectives could make a recommendation as to what proportion of the fund should be invested domestically, regionally and globally. However, even though these stipulations would not be binding on the fund, the SWF managers must strive to meet such criteria, wherever it is so possible.

India should have its investment objectives clear before treading into experimenting with SWFs. It needs to reflect on issues like purpose of the fund, its time horizon, rules governing allocation of withdrawal and investment strategies and implementation policies.

Incoming Investments

As mentioned earlier, the authority which is established to tend to the operations of the SWF hosted in India could also regulate the incoming investments of foreign SWFs. At the same time, India must look to keep abreast of the motives behind investments by foreign SWFs and consider the possibility of entering into agreements with investor nations, like the US, regarding their SWF policies.

Evidence That We Are ‘There' Already

Coming to a point raised at the onset of this essay - in one way, India has already set out on its journey to set up a SWF. In his budget speech in February, 2007, the Finance Minister had announced a scheme for the setting up of a special purpose vehicle (SPV) to meet the domestic needs of the infrastructure sector. Hence, India Infrastructure Finance Corporation Ltd. was created. In the technical sense of the word, such an SPV qualifies as a SWF since it uses India's foreign exchange reserves to the tune of US $5 billion for its funding. This, more than any argument can, should drive home the point that India is prepared to invest in such project. The proposal, a prototype, was met with high industry enthusiasm and was seen as a progressive step.


In the meantime, as the world awaits the culmination of this debate and the commencement of a sluggish parliamentary process, India watches with great interest, with a glint in its eyes, as the saga of the SWF dominance unfolds in the arena of international finance and diplomatic relations. Slowly, but steadily, it is gaining confidence that somewhere out there, there is a very relevant role for it to play as well. Until then, we prepare ourselves.

Yes, we are ready. Now, all we need are the structures.

Source: Essay UK -

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