Sovereign wealth funds (SWFs) are investment vehicles that are initiated and managed by the government. These are mainly established to invest abroad for achieving certain predetermined macroeconomic objectives. In recent times, SWFs and the associated assets globally have attained exponential growth. India too has witnessed a significant growth in SWFs, especially since the start of the Covid-19 pandemic.
Within the list of thirty-two FPIs that are invested in India, the SWF growth story has seen these rank fourth among foreign portfolio investors (FPIs). These investment vehicles have expanded their footprint to include real estate markets and also debt instruments.
A sovereign wealth fund (SWF) is a pool of assets, also known as social wealth funds, managed and controlled directly or indirectly by a country’s government. Their source of funds includes natural resource revenues that are state-owned, bank reserves, trade revenue surpluses, etc.
They are usually government-owned entities that invest in overseas debts and equities markets. These wealth funds are established to attain a variety of objectives like diversifying assets, generating better returns on revenue, promoting industrialization, encouraging strategic and political alliances, etc. The past few years have seen significant growth in SWFs mainly due to the rise in revenue generated by oil-producing nations.
Sovereign Wealth Funds can be categorized as:
With the rising growth of SWFs, the Indian government has identified an opportunity to increase foreign direct investment in the country through these funds. Starting from 2020, the government introduced a 100% income tax exemption for SWFs and also introduced rules on how to avail them.
In November 2020, the Central Government of India notified that the Abu Dhabi Investment Authority (UAE’s SWF) became the first fund to receive this exemption under the Income Tax Act, 1961. The government also expedited the SWFs application procedure to complete it within two months from its receipt.
To promote investments coming from foreign SWFs in certain key sectors such as infrastructure, the Central government, in the Union Budget of 2020, proposed various incentives for SWFs. The proposal included a 100% tax exemption on income generated through dividends, long-term capital gains, and interest earnings from SWF investments in the country.
As part of The Finance Act, 2020, the new exemption is available to qualifying investments made by foreign SWFs in specified infrastructure businesses. The criteria is that the investment should be made during the period of 1st April 2020 to 31st March 2024 and held for at least three years.
The Central Board of Direct Taxes (CBDT) of India later expanded the meaning of ‘infrastructure’ to include sectors such as energy, sanitation, transport, telecommunication, social and commercial infrastructure (example, hospitals, tourism, educational institutions, etc.), water, etc. Also included in this are various sub-sectors that are part of the Harmonised Infrastructure Master List that was updated in 2018.
Currently, the Abu Dhabi Investment Authority and all other notified SWFs along with notified pension funds are permitted to avail of this exemption.
India’s very own SWF is the National Investment and Infrastructure Fund (“NIIF”). This fund was established to invest in the country’s infrastructure, mainly to fund commercially viable greenfield projects. It may not be an SWF as per the term’s definition since it sources funds from other sources instead of the Government of India. However, the government too invests some money in the project.
The Indian government has been unable to set up a pure SWF that invests in the best investment opportunities across the globe. This is mainly due to political reasons since the government is unable to prioritize profits and focuses on investing the surplus towards social needs. Funds like NIIF are the closest possibility to an SWF in the Indian context.
As per the latest updates, NIIF focuses on investments towards highway development and clean-energy projects. It aims to raise funds amounting to Rs. 40,000 Cr of which 50% is expected to be provided by the Indian government. Abu Dhabi Investment Authority is also said to have committed USD 1 Bn in the NIIF.
Here are some of the positive aspects about SWFs:
Some of the points to consider for investors considering an investment in SWFs are:
Sovereign wealth funds are currently not available for investment by retail investors in India. However, just like the global markets, the Indian markets too are witnessing a steady growth in these investment vehicles. Therefore, retail investors can hope to explore these avenues in the near future.
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