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Centre puts SWFs under the scanner

Centre puts SWFs under the scanner
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First Published: Mon, Mar 10 2008. 12 52 AM IST
Updated: Mon, Mar 10 2008. 12 52 AM IST
New Delhi: Mirroring global worries about growing clout of so-called sovereign wealth funds (SWFs), the Indian government is working on ways to identify them and assess the extent of their investment in India.
As a first step, the finance ministry is going to come up with a common working definition of such funds and identify their Indian holdings, said a senior official in the ministry who did not want to be named.
“We don’t want anecdotes; we don’t want impressionistic views. We want data,” is the directive given to finance ministry by the top tier of the Indian government, including the Prime Minister’s Office, this official said.
SWFs are special purpose investment vehicles created by governments with surplus foreign exchange to invest overseas, especially in West Asia and Asia. Over the last year, there have been growing global concern about SWFs as generally their aims have been unclear as compared to a private investor who is driven by profits.
Meanwhile, the funds have invested about $75 billion (Rs3 trillion) in companies such as banking giant Citigroup Inc. and automaker Daimler AG. The top fund, China Investment Corp., is reported to have $200 billion in funds and has stakes in Blackstone Group Lp and Morgan Stanley, both of which, in turn, invest in many other companies through their own funds. The Qatar Investment Authority is believed to be the next largest SWF with an estimated size of $60 billion.
On the Indian side, other than the Prime Minister’s Office and finance ministry, the office of the National Security Advisor and Reserve Bank of India have been involved over a couple of months in brainstorming SWFs.
In October 2007, RBI governor Y.V. Reddy flagged India’s position on the global concern about SWFs during a speech in Mumbai.
“India has a stake in the on-going debate by virtue of its increasing importance in global capital flows. The critical issue relates to standards of governance and transparency that are adopted by such funds and the extent of comfort that investee countries have in this regard,” Reddy said.
The finance ministry has to grapple with complexities in trying to define an SWF, the official said. At one level, it is easy to identify some SWFs, such as Norway’s Government Pension Fund. However, as the aim is to separate a standard foreign institutional investor driven by profit objectives from a sovereign investor with strategic objectives, complications come up.
Some investors from West Asia, for instance, invest in their own capacity. However, loose governance standards can mean an individual’s money snakes in and out of the country’s SWF, making demarcation tough, the official said.
Similarly, if a state-owned firm motivated by strategic aims uses a private multinational investor to invest money in specific Indian companies, identification becomes difficult, he added.
SWFs have existed for about 50 years, but it is their recent growth in size that has triggered concerns. According to the International Monetary Fund (IMF), SWFs’ sizes are likely to grow threefold over the next five years to $6-10 trillion.
The growth in SWFs is being driven by foreign exchange surpluses generated by some countries on account of historic highs in oil prices and trade surpluses.
Countries such as United Arab Emirates, Norway, Saudi Arabia, China, Kuwait, Russia, and Singapore control the world’s largest SWFs. Since November 2007 alone, SWFs have pumped in more than $40 billion as capital in US and European banks that suffered big losses in subprime crisis.
“Some observers worry that SWF investments may be motivated, in certain cases, by political objectives. Concerns have been raised about how SWFs fit into the domestic policy formulation of countries with such funds,” said a March 2008 IMF study on them.
Australia recently became the first developed country to officially articulate a set of principles which would be applied to scrutinize SWF investments.
IMF has been asked by some of its member countries to come with proposals for a voluntary set of best practices in management of SWFs. It is supposed to table its proposals at a meeting next month, said a senior economist, who did not want to be identified.
Some countries with SWFs such as Singapore, operating through Temasek Holdings and Government Investment Corp., are open to following an IMF code to prevent a political backlash, the economist said.
It is China’s aims which have many countries worried, said the finance ministry official. China, for its part, has been reluctant to submit to governance practices pushed by external agencies.
“The claim that sovereign wealth funds are causing threats to state security and economic security is groundless,” said Jesse Wang, an executive vice-president and chief risk officer of China Investment Corp., The Wall Street Journal reported in a 7 March article also carried by Mint. “We don’t need outsiders to come tell us how we should act.”
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First Published: Mon, Mar 10 2008. 12 52 AM IST