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Takeover rules to guide sovereign wealth funds

India has still not decided on regulations for sovereign wealth funds (SWF). However, existing provisions in the takeover code will be applicable to SWFs, according to Reserve Bank of India governor YV Reddy.

The on-lending of foreign exchange reserves through IIFCL to Indian companies abroad will be treated as external commercial borrowings, Mr Reddy clarified. Globally, many countries have floated SWFs, which utilise a portion of their forex reserves to invest in a variety of assets in overseas markets to earn higher returns.

Speaking at a session on ‘The Role of Government-owned Investment Vehicles in Global Capital Flows’ in the International Capital Markets and Emerging Markets Roundtable held in Washington DC on Monday, Mr Reddy said, “India has not yet considered regulatory initiatives, especially addressing SWFs. However, existing provisions regarding fit-and-proper or takeover code are applicable to all investors, including SWFs.”

India is still at the stage of assessing the pros and cons of setting up an SWF. It is monitoring recent developments on enhancing transparency and disclosure in respect of hedge funds, private equity and SWFs, Mr Reddy said.

In particular, India is watching with great interest the development of global codes, standards and practices as regards SWFs, both in view of the presence of SWFs in the Indian financial market and the ongoing debate on establishing an Indian SWF, he added. In the Indian context, as per the scheme envisaged by the government, RBI would be investing in tranches up to $5 billion in government-guaranteed foreign currency-denominated bonds, issued by an overseas SPV of India Infrastructure Finance Corporation (IIFCL), a government-owned company.

Thus, the funds raised would be utilised by the company for on-lending to Indian companies implementing infrastructure projects in India and/or to co-finance ECBs of such projects for capital expenditure outside India without creating any monetary impact. The lending by the SPV under the arrangement would be treated as external commercial borrowings (ECBs) and would be subject to the prescribed reporting and disclosure requirements.

Globally, policy initiatives on SWFs have started very recently. The OECD approach on SWFs is that international co-operation can build mutual trust and keep markets open. The OECD Investment Committee and its non-OECD partners have agreed that over the coming period, they will follow a two-track approach to these issues. The European Commission (EC) is proposing a common EU approach to respond to concerns over SWFs and enhance the transparency, predictability and accountability of SWFs’ investments while maintaining an open investment environment.

The recent joint release by the US, Abu Dhabi and Singapore sets out policy principles for SWFs as well as the countries receiving SWF investment. While recent reports suggest that Germany is contemplating a legislation which will enable it to block ‘unwanted’ investments by SWFs, Mr Reddy said.
Source: Economic Times

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