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India proposes new financial institution to fund overseas assets acquisition
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23rd September 2013
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KOLKATA (miningweekly.com) – The India government is considering creating a developmental financial corporation dedicated to fund mineral and energy acquisitions overseas.

According to an official involved in drafting a note on the subject, the proposed financial corporation, or overseas investment corporation, would have the primary objective to offer equity and debt financing to enable Indian government-owned companies to leverage their balance sheets in funding overseas acquisition of mineral and energy assets.

The structure of the new overseas investment corporation would be different from the previously considered sovereign wealth fund, which was rejected earlier this year by the Finance Ministry, the official said.

In June 2013, the Finance Ministry informed government-owned companies, which included oil exploration and production major ONGC Limited, iron-ore miner NMDC and steel producer Steel Authority India Limited (SAIL), that the creation of a sovereign wealth fund to acquire overseas assets by drawing on India’s foreign exchange reserves would be risky given the government's high current account deficit (CAD).

The adverse CAD would also not permit the government to offer sovereign guarantees to companies raising foreign exchange to fund foreign acquisitions, the Ministry informed the companies.

Under such circumstances, the new structure proposed for the overseas investment corporation, which would be administered and managed by the Department of Economic Affairs of the Finance Ministry, would be empowered to source foreign exchange resources from the Reserve Bank of India on a spot basis and to raise long-term debt funds from domestic markets.

But the government would not make any funding available from yearly budgetary allocations to the investment arm, the official added.

Citing reports prepared by India’s Planning Commission, the officials said that the China model of acquiring mineral and energy assets overseas was the single biggest competitive hindrance to Indian efforts to acquire similar assets.

Acquisition of overseas assets by Chinese companies were backed by well-established and extensive bank financing, government undertakings and guarantees and diplomatic bilateral relations with target countries that were not available to Indian companies venturing overseas, the officials added.

During two consecutive financial years ending March 2012, Indian companies were successful in concluding $5-billion of foreign acquisitions in mineral and mining sectors, while Chinese companies were able to conclude deals worth $21-billion during the same period.

Edited by: Esmarie Swanepoel

 

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Picture by: Reuters