Sovereign Wealth Funds, Investment vehicles of Governments are increasingly seen in action through acquisition of either natural resources like oil and gas fields or equity holdings in MNCs. While the reasons for establishing a SWF may vary from commercial to strategic ones, SWFs’ influence on the countries and corporate is substantial. Since they mostly stay invested for a long-term they do not pose threat of pulling out in the short term and creating huge volatility in the financial markets. Since their investment corpus run to billions, by staying invested for a long time, they have a stabilizing effect on the capital market even during crashes and short term fluctuations. However, regulations and guidelines of the SWF also needs to be put in place in order to avoid it from exercising any soft control or strategic moves that may affect the sovereignty of the country allowing investments.

SWFs provide long-term funding to the countries where they are investing facilitating infrastructure development, capital mobilization and liquidity to the capital market. India has huge deficit in terms of financing for long-term projects, especially in infrastructure. While regulations have to be intact to avoid exploitation by foreign governments, letting SWFs in the country will create a huge advantage for the country’s myriad sectors.

INTRODUCTION TO SOVEREIGN WEALTH FUNDS :

Sovereign wealth funds are investment funds managed by the state with an intention of earning revenues on its idle foreign resources. The investments are made in financial assets like stocks, bonds, gold and assets of the nature of resources like oil, mines or gas. These wealth funds can be funded by excess foreign reserves accumulated through trade, proceeds from privatization, fiscal surpluses in the economy or foreign currency operations. The reserves funding these SWF do not include reserves that are to be employed in the normal conduct of monetary and balance of payment operations.

The purpose of establishing SWF are as follows:

1. Protecting and stabilizing the budget and economy from excess volatility in revenues/exports
2. Diversify from non-renewable commodity exports
3. Earn greater returns than on foreign exchange reserves
4. Assist monetary authorities dissipate unwanted liquidity
5. Increase savings for future generations
6. Fund social and economic development
7. Sustainable long term capital growth
8. Political strategy

BENEFITS OF SWF:

The benefits arising out of a SWF are multifold. They are as follows:

Productive employment of resources (Savings Funds): The economies which have excess foreign reserves or fiscal stimulus do not earn any return from idle resources which can be put to use in order to earn returns on them. The returns earned can be utilized to stabilize the market in times of turbulence, downturn or recession.

Resource acquisition: The fund invests in resources like oil and gas fields abroad in order to achieve energy security and meet its growing demands. CIC’s (China Investment corporation, the SWF of China) recent acquisition of gas fields and oil wells abroad is in this direction only.

Market stabilizers (Stabilization Funds): SWF can act as market stabilizers in case of economic and financial downturns. It is mainly created in countries to insulate their economy from swings in commodity prices. They can mitigate market stress like they have done in Asian markets by financial backing of large banks thereby ensuring continuous bank-lending.

Economic development (Development funds): Infrastructure is a huge priority in developing countries and requires lenders with long-term capital commitment. SWFs can fund the infrastructure operations of a country.

Ensuring Social security (Contingent Pension Reserve Funds): The population of developed countries is ageing and the workforce is shrinking. Providing social security to the huge population will be a huge drain on the exchequer. Since the birth rate also has shrunk, taxing few to support many will neither be sustaining nor is socially acceptable to the masses. So it becomes imperative for these ageing countries to earn significant returns on its pension funds.

In the investing country, SWF could lead to “tax cuts, better public works, and stronger state-run businesses.” It can also, as was previously said, provide a diversification in the investing country’s assets and a protection from the exchange rate volatility and from the downs of the market.

PRESENT STATUS OF SWFs GLOBALLY:

Name of the SWF

Country

Fund size

($ billion)

Fund Type

Recent activity

Abu Dhabi Investment Authority