Part of forex reserves to finance infrastructure

Giving shape to the idea of using the burgeoning forex reserves for the country’s infrastructure development

Giving shape to the idea of using the burgeoning forex reserves for the country’s infrastructure development, the Government has decided to set up a specialized “wholesale banking company” in a separate country with a mature financial system.

Sources said that the Government along with the Reserve Bank of India have shortlisted two possible locations — Singapore or London — where this new finance company would be located. Ruling out tax havens and cities such as Hong Kong and even New York as possible locations for this new company, officials said that the final name is expected to decided shortly.

This company, which is similar to Singapore government’s Temasek, would use a portion of the country’s forex reserves to finance both buying of equipment meant for infrastructure development in India as well for acquisition of assets by companies in other countries that directly benefit India’s interests.

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Starting with an initial equity corpus of $ 100 million, the caveat that is being attached for the “wholesale banking company” is that it would not directly pick up equity but would extend only loans to companies. These loans then can either be used for financing equity investments or as even direct loans for, say, the purchase of equipment. Added to this, the money would be given to Indian companies that use the same for infrastructure development only.

While Temasek also directly picks up equity in projects in other countries (apart from giving loans) — even in financing of acquisition of assets or in participating in a international project like a transcontinental gas pipeline — the benchmark for the new wholesale banking would be that these should directly benefit India’s infrastructure interests.

While it was the Deepak Parekh committee that suggested the use of forex reserves for financing acquisitions abroad, it needs to be mentioned that the lending of the new wholesale banking company would be subject to the overall external commercial borrowing limit of India.

At present, the Department of Economic Affairs (DEA) and the RBI are yet to work the exact mechanism of actually transferring the forex to the new company.

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While the law does not allow RBI to extend these funds to the new company as a loan, the RBI is of opinion that these funds can be given for refinancing. However, the DEA is against such a method as this would increase the costs for the new company.

RBI is now expected to come back with an alternative method to transfer the forex reserves to the new company. Initially, around $ 5 billion is expected to be used from the forex reserves under this new initiative.