Sovereign Funds Set to Get More Room for India Play

Open offer trigger may be raised to 20%; govt-owned funds from same country to be treated independently

Sovereign wealth funds (SWFs), which have emerged as formidable global investors and often evoke concerns in countries where they put in money, will soon have a greater play in India.
The finance ministry and regulators will change the rules to give these investment funds floated by governments of rich countries more headroom when they buy shares in listed Indian companies. Also, local authorities will treat SWFs emanating from the same country independent of each other—a proposal that is expected to go down well with the two Singapore governmentowned funds, Temasek and GIC.
The 50-odd SWFs registered in India invested between $8 billion and $10 billion last year. The proposals were recently discussed by the board of capital market regulator Sebi. It was proposed that SWFs belonging to countries that have signed treaties or agreements with India should be allowed to buy up to 20% shares of a listed company without making an open offer to existing shareholders. At present, all entities, except banks and financial institutions like LIC, have to make a minimum 20% open offer after their holding touches 15%.
The suggestions reflect the terms of economic co-operation treaties that India signed with countries like Singapore. It has, however, not been able to implement the terms following resistance from the Reserve Bank of India (RBI), which among other things viewed that funds like Temasek and GIC, owned by the same government, should be treated as investors belonging to the same group.
Most sovereign funds investing in India are registered with Sebi as foreign institutional investors (FIIs). Since no FII or FII group can hold more than 10% in a single company, RBI had said the combined investments of Temasek and GIC should not cross the stipulated limit in India's second-largest lender, ICICI Bank.
The Impact

• Sovereign funds—owned by foreign governments—can invest up to 20% in Indian firms without triggering open offer

• Singapore-based sovereign funds like Temasek and GIC to benefit immediately. Also, funds belonging to countries signing economic agreements with India will get a leg up

• Boost to portfolio flows without promoters worrying about dilution of control
The Background

• An agreement in 2005 that allowed Temasek and GIC stakes of up to 20% in Indian firms

• RBI disallowed these funds to raise their stake in ICICI Bank claiming they were acting in concert The waiver will be on a
• case-to-case basis Time to Change Rules, Feel Brokers
Stock market circles think it's time to change the rules. "Sovereign funds are only pure investors in companies and their intention is not to destabilise the current management," said Motilal Oswal, chairman of brokerage Motilal Oswal Securities.
The ministry of external affairs feels the state has an obligation to ensure its laws are amended and applied in a manner which would ensure respect for treaty obligations while the attorney-general says "Sebi would be entitled to grant specific exemption having regard to treaty obligations, but reasons would have to be recorded in writing".
Changes in some rules are already underway. For instance, a committee looking into the Takeover Code has suggested the threshold limit that triggers an open offer should be raised to 25%. "However, it's not yet clear whether the relaxation would be extended to FII regulations allowing individual sovereign funds to go beyond the prescribed 10% limit," said Siddharth Shah, who heads funds practice at law firm Nishith Desai.
Other SWFs that have invested in India include China's National social Security Fund, Abu Dhabi Investment Council, Australia's Future Fund Board of Guardians, Ireland's National Pensions Reserve Fund, Brunei Investment Agency, New Zealand Superannuation Fund, and Canada Pension Plan Investment Board among others.
Besides participating in the secondary market, SWFs invest through other routes like foreign direct investment (FDI) and foreign venture capital. At times, the funds use multiple investment vehicles with different investment objectives and structures. The comprehensive economic co-operation agreements signed between India and other countries recognise such vehicles of the Sovereign as independent of each other for the purpose of application of Sebi rules and regulations.

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