SEBI study warns against an Indian sovereign wealth fund

India should desist from setting up a sovereign wealth fund (SWF) using its high, but depleting foreign exchange reserves of around $250 billion, a Securities and Exchange Board of India (SEBI) study has warned.

Unlike the Gulf wealth funds started in the 70s and early 80s, funded by oil revenues, Indian foreign exchange reserves are mostly in the capital account and hence cannot be compared with petro-dollar, or pure trade receipts, the report pointed out.

"India's foreign exchange reserves are built on capital account inflows and hence it is subject to capital flight, said a report prepared by SEBI officials.

In contrast, the Gulf sovereign funds generally generated relatively higher returns, ensuring smooth flow of income to the holders of the fund. Return on investment was the main criterion of investment for the funds.

In the decade of nineties, social benefits became the main criterion and subsequently, investing the funds safely became the main concern. In the decade of the twenty-first century, countries created SWFs out of their foreign investment pattern.

''Funding an SWF from capital account surplus is risky since the capital flows can reverse their direction any time," SEBI said in the bulletin.