The government is considering a sovereign investment fund with an initial corpus of $5 billion to acquire companies abroad. The investment fund may also be used to bolster the country’s energy security by acquiring coal mines and oil and gas blocks abroad.
Prime minister Manmohan Singh has issued a directive to the finance ministry in this regard, and an announcement is likely in the Budget, an official said.
According to officials, one of the options available to the government is to create a special purpose vehicle (SPV), which will borrow funds from RBI in the form of long-term securities in foreign currency and lend the same to Indian companies at lower rates. Thus, RBI and the government will be able to earn more on forex reserves, which currently fetch average returns of 3.5-4%.
The new fund will be on the lines of the infrastructure SPV being set up in London. It is learnt that the decision to form a fund was taken at a recent meeting of the PM’s council on trade & industry. Along with industry leaders, Planning Commission deputy chairman Montek Singh Ahluwalia, finance minister P Chidambaram and commerce & industry minister Kamal Nath were present at the meeting.
The sovereign fund is part of the government’s plan to maintain high economic growth. Kuwait Investment Authority, the Government of Singapore Investment Corporation and Temasek Holdings are examples of such sovereign funds. Last September, China floated a $200-billion sovereign wealth fund, China Investment Corp.
Singapore earns over 20% annually by deploying its sovereign wealth funds in diversified assets abroad. India earns less than 5% by investing its forex reserves in US treasury bills.
At times of excess capital flows, the returns turn negative as it pays more than 5% interest to sterilising excess dollar flows by soaking up liquidity through bonds.
A sovereign fund is an investment vehicle created to manage national savings to generate higher returns. It is usually carved out of the official reserves of a country.
Countries with large balance of payments surpluses transfer excess foreign exchange reserves to sovereign wealth funds (SWFs). Normally, SWFs make investments in high yielding assets including longer term government bonds, corporate bonds, equities, real estate, private equity and hedge funds.
Source: Economic Times