India mulls setting up sovereign wealth fund to invest in overseas energy assets

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"We have large (foreign exchange) reserves... which have associated costs. Up to a certain level, costs are justified in minimizing the risk of fluctuations and any kind of shocks," said Planning Commission member Surya P. Sethi.

However, beyond a point, costs cannot be justified and one needs to find other ways to earn revenue, he said.

Sethi said the corpus of the fund has to be in "billions of dollars" and the proposed fund would be one way to earn higher returns as compared to those investing in domestic projects.

"A decision on this (sovereign wealth funds) would be taken after the budget. The fund would invest in overseas energy assets like Temasek of Singapore does," he said.

Singapore earns over 20 percent annually by deploying its foreign reserves in its sovereign wealth funds in diversified assets abroad.

In comparison, India earns less than 5 percent by investing its foreign exchange reserves in US treasury bills, the Planning Commission official said.

A senior government official, requesting not to be named, said the central government may propose setting up a sovereign wealth fund with an initial corpus of $5 billion to acquire companies abroad.

A special purpose vehicle (SPV) may be provided by the government that will allow it to borrow funds from the Reserve Bank of India (RBI) in the form of long-term securities in foreign currency and lend the same to the Indian companies at lower rates.

It will also allow the RBI and the government to earn more on foreign exchange reserves, which currently fetch average returns of 3.5-4 percent.

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