Sovereign Wealth Fund: Is It Right For India?

There is a call for India to create a sovereign wealth fund. We look at the risks and the rewards

Published: Apr 9, 2010 07:09:33 AM IST
Updated: Jun 7, 2011 02:55:52 PM IST

Oil Companies Want It
Creating a sovereign wealth fund (SWF) will allow India’s forex reserves to be used for investment in oil assets. There are about 37 major sovereign funds worldwide — about two-thirds of this money comes from oil and gas revenue. The most successful examples of SWFs are those from Norway, Kuwait and Brunei.Sovereign Wealth Fund: Is It Right For India?

 Illustration: Vidyanand Kamat

Economist’s Take
“Sovereign Wealth funds are for countries that have trade surplus and no domestic markets. India doesn’t have a trade surplus but its domestic markets are deep. India doesn’t need to have a SWF for oil”, says economist Avinash Persaud, non-executive director, Ellara Capital.

Does ONGC Really Need The Money?
Oil and Natural Gas Corporation is one of India’s most under-leveraged companies with a debt-equity of 0.01. It had cash and short-term investments amounting to close to Rs. 9,000 crore at the end of March 31, 2009. For all these years of overseas acquisitions through subsidiary company ONGC Videsh (OVL), its problem has never been shortage of cash. Whenever ONGC has lost out to Chinese players or other competition, the problem has been the value the Indian oil major was willing to put to the deal.

“Instead of having a separate SWF, Indian oil companies should be doing this job on their own as they are in a better position to handle it by raising their own funds,” says a fund manager with a leading mutual fund.

Others Are Doing It; Why Can’t We?
With reserves of $2.4 trillion and a $300 billion sovereign fund, China has outpaced India in the quest for resources to feed its economy. Chinese companies spent about $32 billion last year buying oil, coal and metals assets abroad, while ONGC invested $2.1 billion to buy Imperial Energy.

China has the backing of China Investment Corp. and SAFE (State Investment of Foreign Exchange) Investment Company, both together account for an SWF of $636 billion. Oil companies and the petroleum ministry feel this could be the right way to go. But experts say this is not the best way to use foreign reserves.

Do We Have The Appetite For The Risk?
One of the concerns is how much risk a government-controlled fund will be willing to take. Investments in oil are often high-risk-and-high-return bets. The petroleum secretary, S. Sundereshan, who is seen to be supporting the move towards forming an SWF, says he would like to see Indian oil companies make one big acquisition every year. Many of the deepwater bets taken by the smartest oil companies in the world have proved to be wrong, sinking millions of dollars. Will an Indian sovereign fund, where every decision has to be cleared by an empowered committee, be able to take these risks? The other problem is the speed of decision making. Government-owned oil companies like ONGC and BPCL already face red-tape and delays in getting clearance, often resulting in the opportunity being lost. Will it be any different for the sovereign fund? The fund will have to be answerable for its returns.


(This story appears in the 16 April, 2010 issue of Forbes India. To visit our Archives, click here.)

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  • Prasad Rao

    Sometime back, my wife told me she was investing money regularly in a 'chit fund' with a reputed gold jewelry shop. You pay measly amounts monthly for a few years. On maturity, the proceeds may be used to purchase gold or gold jewelry. Seems innocuous, even attractive? So what's the catch? For one, the jewelry outfit can count on a guaranteed market for gold from its deposit holders - one that guarantees perpetual demand and props up gold prices. Higher demand and higher prices, that a worthy strategy!<br /> <br /> I worry the proposed SWF is but modified 'cheat fund'. Is the fossil fuel industry promoting the SWF as a means to guarantee both prices and quantities in a world roiled by concerns of global warming? After all, government-sanctioned investment is 'market-protected' investment (sanctioned by Ministers whose campaigns leaked and reeked of oil money). Surely, no oil company, not even ONGC, will allow its renewable competitors to gain market share in its territory. And with the government investing Oil revenue in 'fossil-fuel-friendly' projects round the globe, the Oil industry may be rest assured of continued reliance on oil for decades even while promising nuclear technologies languish in our labs manned by 'beheaded' scientists. <br /> <br /> Proponents may claim the SWF fulfills a real need for diversification of 'natural resource-derived wealth' and thus alleviates the probability of a 'resource curse'. But they fail to take cognizance of the umpteen ways in which such funds can be manipulated to the benefit of certain industry interests, politicians, bureaucrats, not to mention entrenched interests beyond the boundaries of our nation. Do we need another global financial meltdown to teach us lessons afresh?<br /> <br /> Beware the 'Tides of SWF'!

    on Apr 10, 2010