Pulok’s Sovereign Fund Sans Funds!

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There are reports that the Prime Minister’s office (PMO) is driving the setting up of a company — India Overseas Investment Corporation (INOIC) — under the finance ministry on the lines of a sovereign wealth funds elsewhere in the world.

The idea, no doubt, is to discover some financial muscle for access to overseas natural resources.If we’re happy with a cut-copy-paste “me-too” of what Norway, Russia, China, South Korea, Singapore, Malaysia, Brunei, Qatar and UAE have done to push overseas acquisitions and business through such funds., the concept note quoted by The Times of India hasn’t come a day too soon.

The note, in fact, is to the credit of PM’s principal secretary Pulok Chatterjee for emphasising the need to secure access to raw materials, “wherever they were available” and commissioning a blueprint of an overarching institutional mechanism for such investments.

Beyond the conventional reasons of acquiring energy assets to justify the need for INOIC, sheer national aspiration certainly merits such a foray.But a sovereign fund is worth its salt only if the country swims in current account surplus. Muscle is a prerequisite for macho.

But PMO and FinMin seem to think that muscle is mere detail! The staffing of such a sovereign fund is another reason for my doubts that we can go an inch beyond good intent.

Globally, those managing these funds are typically above the scanner of Parliamentary interference. Can that ever be the case in India?

Also, staffing in the world’s top funds is invariably left in the capable hands of professional fund managers. Many, as is the case with Singapore’s GIC and Temasek, are, in fact, expats who work on a heady mix of salaries and incentives, and at arm’s length from politics and the media.

The accountability of such talent has traditionally been to the ruling Lee family. This is also the case in the $500-billion+ Abu Dhabi Sovereign Fund where the managing director Sheikh Hamed bin Zayed Al Nahyan is from the ruling Nahyan family and the board is chaired by Khalifa bin Zayed Al Nahyan, the ruler of Abu Dhabi.

Can such an opaque structure even get imported to India?

In fact, in one form or the other, our deficits have been the reason why such an idea has been passed around for more than seven years at least, President APJ Abdul Kalam being one of the prominent votaries.

The plan as of now is to have it as Government’s holding arm and registered with the Reserve Bank of India as a non-banking financial institution with a paid-up capital, raising funds through rupee bonds of 15-20 years with sovereign guarantee.

State-run entities, banks and financial institutions are expected to subscribe (read bullied!) to these papers using their surplus funds at a coupon rate to be set marginally higher than Government securities.

Another serious flaw in the concept note for the fund is that the scope includes “other key areas such as food security (also ) requires access to fertilizers to augment food stocks as well as to enhance farm productivity.”

Such hybridisation of the Indian sovereign wealth fund is a recipe for a dead end.

While INOIC will not borrow from RBI and will purchase or swap its rupee funds with foreign currency from the central bank at market rates, it aims to ensure a market-oriented mechanism and avoid management of temporary surplus forex funds.

This is also expected to help state entities bypass the Public Investment Board’s approval if the quantum of overseas investment is within INOIC’s ambit. Also, the company is expected to act as a single window clearing and financing framework that will be faster and more responsive than the existing system involving multiple layers of approvals for overseas acquisitions. Essentially, it means ready cash for an entity acquiring assets abroad.

So, the key question: What happens to inevitable probes by the Comptroller and Auditor General (C&AG) and the Central Vigilance Commission (CVC) which x-ray nearly all deals from their sharp and cynical prism of hindsight 20:20?


(The columnist is CEO & Co-Founder, India Strategy Group, Hammurabi & Solomon Consulting. Tweets @therohitbansal)

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