Sovereign funds investing in India: Outlook for 2024

Recently, the rapid increase in direct investment in India by global sovereign wealth funds has been attracting attention. Specifically, on February 26, 2024, Goldman Sachs and Mubadala, Abu Dhabi's sovereign wealth fund, announced a US$1 billion private investment deal for joint investments in the Asia-Pacific region, with a particular focus on India. A credit agreement was concluded.

Foreign investors from major economies have shown strong interest in becoming a part of India's business ecosystem. India is expected to be the fastest growing G20 economy in fiscal year 2023-24. A range of global investors are on that upward trajectory, including those from the hydrocarbon-rich Gulf states. In October 2023, the United Arab Emirates (UAE) declared its intention to spend USD 75 billion in India over a period of time, and Saudi Arabia set an investment target of USD 100 billion in the country.

Capitalizing on this positive momentum, India's Finance Minister Nirmala Sitharaman, in her latest interim budget, has provided certain tax incentives for start-ups and investments from sovereign wealth and pension funds till March 31, 2025. announced that it would be extended.

Policies such as Make in India, production-linked incentive schemes, liberalization of foreign direct investment (FDI) rules, and setting up of the International Financial Services Center (IFSC) at GIFT City have cumulatively created investment opportunities for India. I'm here. international players. Major foreign investors are not only attracted to setting up manufacturing units in India but are also interested in pooling capital through multiple financial channels.

What is a sovereign wealth fund?

A sovereign wealth fund (SWF) is a state-owned investment fund funded by a country's surplus reserves, such as revenues from natural resources, trade surpluses, and budget surpluses. SWFs serve to benefit a country's economy and its people and often have targeted objectives, such as acting as venture capital for the private sector.

Norwegian SWF reveals investment portfolio in India

In 2023, the Norwegian Sovereign Wealth Fund, the world's largest wealth fund with assets of USD 1,576 billion, has unveiled its complete portfolio. The market value of the fund's investments in India has increased significantly, reaching nearly USD 24 billion by the end of December 2023. In the same period in 2022, the amount was USD 17.12 billion.

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The Norwegian SWF, officially called Government Pension Fund Global, has expanded its investment scale in terms of capital and number of Indian companies. A year-on-year comparison shows that Norwegian SWFs invested in 459 Indian companies in 2023, compared to 416 in 2022. Jio Financial Services Ltd. was the largest new addition to the fund, with a final holding value of nearly 10 billion yen. US$100 million, ownership of the business 0.56%. The top two companies with the largest increase in ownership were Bajaj Electricals Ltd and Home First Finance Co. With his 0.38% increase in ownership, the value of Punjab National Bank's holdings increased the fastest among all companies, reaching 68 times its starting point.

Norwegian sovereign wealth fund allocation in India 2022-2023

Data: Norges Bank Investment Management (NBIM)

In addition to the 459 companies, the full disclosure of the Norwegian SWF portfolio also mentions investments in two more companies, namely the Government of India and Reliance Industries, which brings the total investment to 461 companies.

India is becoming a hotspot for wealth fund investors

Among recent financing commitments by sovereign wealth funds is the announcement that the Abu Dhabi Investment Authority (ADIA) will set up a fund of US$4 billion to US$5 billion for investments in India. ADIA, the UAE's largest sovereign wealth fund, has been given the green light to operate through a tax-neutral financial hub in Gujarat's GIFT City.

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It is also attracting attention from European SWFs, and a new sovereign wealth fund set up by Ireland has cited India as a potential investment destination. The €100 billion (US$106 billion) Future Ireland Fund aims to address future challenges to the Irish economy arising from rising health and pension costs due to an aging population and climate change. The Irish government is required to allocate 0.8% of its gross domestic product (GDP) to this fund each year from 2024 to 2035. In January 2024, Ireland's Finance Minister Michael McGrath said that the investment obligation for the Future Ireland Fund had not yet been finalized. , it may be based primarily on global investments.

Regarding Southeast Asia, Malaysia's sovereign wealth fund Khazanah Nasional Berhad has invested USD 400 million in Indian multinational hospitality chain rental and franchise hotel, residential and living space Oyo Hotels & Homes Pvt. Ltd. is reportedly considering leading a funding round.

India's MSCI soars: record weight, bond market buzz

India is improving its market performance, according to a study released by Morgan Stanley Capital International (MSCI) Index. The index provider has increased India's weight in the Global Standard (Emerging Markets) index to a record high of 18.2% in the February 2024 review. India currently has her second highest weighting in her MSCI Global Standard Index, surpassed only by China.

Notably, India's weight in the index has nearly doubled since November 2020. Insights from Nuvama Alternative & Quantitative Research show that this surge was driven by India's standardized foreign ownership limit (FOL) in 2020, a consistent upward trend in domestic equities, and the relatively weak performance of other emerging markets. Something. The research group also estimates that the country could attract up to US$1.2 billion in passive foreign capital inflows.

The inclusion of Indian government bonds in the JPMorgan Chase Global Debt Index from June this year has also increased the country's attractiveness to financial investors.

According to the data provided, bloomberg, the number of issuances by sovereign, supranational and government entities that provided investors exposure to India reached a record in 2023. These issuances reached a five-year high of US$3.2 billion.

Foreign investors are increasing their exposure to India through products such as supranational bonds and swaps ahead of the country's inclusion in global bond indexes. The steady growth of the Indian economy, along with consistent economic policies and political stability, should attract new foreign investors.

Tax exemption for SWFs in India

Since 2020, India has provided 100 per cent income tax exemption for SWFs. Regarding the statement of the Central Government of India dated November 2020, the first fund to benefit from this exemption under the Income Tax Act, 1961 was UAE SWF, ADIA.

India has expressed its ambition to further expand its foreign investment market. In the Union Budget 2020, the country proposed 100 per cent tax exemption on dividends, interest and long-term capital gains income arising from overseas SWF investments in India.

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This new exception was introduced by the Finance Act 2020 and applies to SWFs operating within the country and making qualifying investments in certain infrastructure companies.

The Central Board of Direct Taxes (CBDT) has expanded the definition of 'infrastructure' to include sectors such as water, electricity, sanitation, transportation, telecommunications, social and commercial infrastructure (such as medical facilities, tourist destinations, educational facilities, etc.) I did so. ). The expanded scope now includes all sub-sectors listed in the 2018 Harmonized Infrastructure Master List.

A minimum three-year period from April 1, 2020 to March 31, 2024 was required to make and maintain the investment, but this exemption period was extended to March 31, 2024 earlier this year. it was done.

Global sovereign wealth fund performance in 2023 (USD)

Outlook

When it comes to cross-border investments, increased direct investment in a country means increased confidence. Recent trends show that SWFs are investing in various industries in India, particularly asset management, healthcare facilities, hospitals, cinema and entertainment, and renewable energy projects such as solar and wind power.

Financially stable SWFs are keen to invest in Indian businesses and real estate, from start-ups to real estate projects. These wealth funds are competing fiercely against private equity firms in India's asset acquisition market.

Furthermore, India has outperformed China in terms of cross-border direct investment from SWF funds, even though the US remains the primary destination for cash from sovereign investors.

New foreign companies showing investment interest in the Indian market as well as Kuwait Investment Authority, ADIA, QIA, GIC Private Limited, Norwegian Government Pension Fund Global (Norwegian Bank Investment Management), Temasek Holdings, and GIC Private Limited continues to maintain its footing.