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"India's foreign exchange reserves are built on capital account inflows and hence it is subject to capital flight ... funding an SWF from capital account surplus is risky since the capital flows can reverse their direction any time," said a report prepared by officials of the Securities and Exchange Board of India (SEBI).
Arguing against setting up of a SWF by India, the report, appearing in SEBI's April bulletin, said in the absence of a proper management in place, "the SWFs could be misled to promote domestic political or foreign policy objectives which contradict with the guidelines of Santiago principles." The Santiago principles lay down the code of conduct for transparent and non-political functioning of the SWFs.
The study also raised concerns about "corruption or even underperformance" due to mismanagement of the SWF.
Meanwhile, while giving a clean chit to the SWFs, the report said the US should welcome such investments from foreign governments to defend the home economy, particularly amid the grim global outlook.
"When the protagonist of capitalism (the United States) is in danger and the US government is funding the corporate sector through bail-out packages, the SWFs should not be treated as untouchable," it said. In many west European countries and the US, it is widely believed that the governments through the SWFs are not only looking for economic benefits but may be attempting to achieve political influence as well.
However, the report said, "... There are no evidences so far to suggest political or other motive behind investments by SWFs in other countries." Increased protectionism in the form of different restrictions on the activities of SWFs is not going to benefit the recipient as well as the investor countries, the report added.
The SWFs are government-controlled pools of assets designed as a vehicle of foreign portfolio investment. These funds invest in a large array of assets for a relatively longer time horizon.
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