ET BureauManish Kejriwal was the senior managing director of one of the world’s largest sovereign wealth funds (SWFs), Temasek Holdings, owned by the Singapore government. A Baker Scholar from the Harvard Business School, in whose 8-year-term as the country head, the fund invested roughly $5 billion.
“I believe that the current government under the centralised leadership seems to be the one which can actually execute the concept of a sovereign wealth fund that can tick off all the required boxes and deliver as per its mandate,’’ Kejriwal, who now runs $500m Keedara Capital, told ET . Edited excerpts:
Recently, we have seen an aggressive rush by sovereign wealth and pension funds to invest in India. How relevant is a sovereign wealth fund to India?
At the very outset, it’s important to note that most countries that have sovereign wealth funds tend to have a budget surplus (Norway, Singapore, Abu Dhabi, etc) which fund the corpus of the SWF. In India, we do not have that advantage. Hence, in order to launch an SWF in India, we would either have to gradually create that corpus by earning dividends annually, or, by slowly divesting some of our stakes in public sector units (PSUs).
This sort of an SWF where the government can transfer its holdings (and the governance) in the PSUs is extremely relevant in India right now. A holding company which takes over the government's role of managing different PSUs, determining their top management, influencing their dividend policy and determining the level to divest would be the primary role of this SWF. This would be a very palatable intermediate step or alternative to “privatisation”, which has been difficult to pull off historically in India.
This also allows the government and the different ministries to focus on their main role of determining the appropriate policy for all companies in a certain sector rather than focusing or worrying about the performance of certain companies in that sector where it has an ownership stake. This separates “ownership” from “governance/management”.
If it’s all about governance, how do you actually decide on the funds? Do you want to maximise returns? Do you want to fulfil certain strategic objectives of the government like investing in neighboring countries? I believe that we can now set up SWFs under our current administration.
Why are SWFs important now?
This sort of an SWF is very important, and it's the right time to launch one. This is because running an SWF is all about allowing it to be run via good governance. We need a management team that understands the government’s criterion and a government that leaves the management alone to manage the fund by itself. Of course, it will report to the PMO or the ministry of finance and if the PM or the finance minister is not satisfied by the performance of the team, then he can fire the team, but if there's no major conflict, the fund should be free to execute the mandate that has been given by the government and maximise its riskadjusted returns.
This is the beauty of the current government. If you asked me this question 10 years ago, it wasn’t possible because I didn't know whether we had someone in the government who had a clear enough idea or the mandate to create such a fund. There were too many low-hanging fruits that each interested party would seek to harvest.
I believe that the current government under the centralised leadership seems to be the one which can actually execute the concept of a sovereign wealth fund that can tick all the required boxes and deliver as per its mandate. If it works, we are not just creating a pool to deploy new assets, but are also taking care of the government’s current liquid and ill-liquid assets.
How can it start?
The right way to develop a new SWF will be to begin as a start-up on a smaller scale and then let it grow naturally. Start off by transferring the equity of some of the PSUs -- let's say, 4-5 PSU banks. Let the SWF raise capital to enhance its capital adequacy and dilute itself at the same time.
Transfer the government’s ownership in 5-6 PSUs to the fund so that all future dividends go to the SWF for reinvestment. It is a future asset and you create an endowment to have a well-run SWF that provides a constant stream of revenue.
Develop clear objectives and deliverables that the team running the SWF is responsible for, and measure and reward them against those objectives. If they perform well, keep transferring more and more PSUs to such an SWF and gradually broaden its role, including the right to determine their boards, which in turn would ensure they hire the best management talent at the PSUs to run them effectively, influencing the PSUs’ capital policy, dividend policy, setting strategic directions for each of the PSUs, etc.
So, this is centralised under a common set of senior leaders rather than left to each ministry.
What are the challenges of building a sovereign fund from your experience at Temasek?
The only way to be successful is by having very high quality talent and a very high quality management team which is purely professional, benchmarked against the best in the world and are paid market salaries; otherwise, you won’t attract the right talent.
Additionally, the policy makers must do what's right for the country and its citizens -- that is the single most important thing. That will be in India’s best interest since so many productive assets are under the public sector. Many of the assets are well run, but by introducing the SWF as an intermediate holding company between the government and the PSU, you separate the policy makers and management of the operating company, which is the biggest advantage in this approach.
The SWF can then decide with the government on what is the right proportion of ownership in any particular PSU --is it 100%, 51%, 49% or 26%?
“I believe that the current government under the centralised leadership seems to be the one which can actually execute the concept of a sovereign wealth fund that can tick off all the required boxes and deliver as per its mandate,’’ Kejriwal, who now runs $500m Keedara Capital, told ET . Edited excerpts:
Recently, we have seen an aggressive rush by sovereign wealth and pension funds to invest in India. How relevant is a sovereign wealth fund to India?
At the very outset, it’s important to note that most countries that have sovereign wealth funds tend to have a budget surplus (Norway, Singapore, Abu Dhabi, etc) which fund the corpus of the SWF. In India, we do not have that advantage. Hence, in order to launch an SWF in India, we would either have to gradually create that corpus by earning dividends annually, or, by slowly divesting some of our stakes in public sector units (PSUs).
This sort of an SWF where the government can transfer its holdings (and the governance) in the PSUs is extremely relevant in India right now. A holding company which takes over the government's role of managing different PSUs, determining their top management, influencing their dividend policy and determining the level to divest would be the primary role of this SWF. This would be a very palatable intermediate step or alternative to “privatisation”, which has been difficult to pull off historically in India.
This also allows the government and the different ministries to focus on their main role of determining the appropriate policy for all companies in a certain sector rather than focusing or worrying about the performance of certain companies in that sector where it has an ownership stake. This separates “ownership” from “governance/management”.
If it’s all about governance, how do you actually decide on the funds? Do you want to maximise returns? Do you want to fulfil certain strategic objectives of the government like investing in neighboring countries? I believe that we can now set up SWFs under our current administration.
Why are SWFs important now?
This sort of an SWF is very important, and it's the right time to launch one. This is because running an SWF is all about allowing it to be run via good governance. We need a management team that understands the government’s criterion and a government that leaves the management alone to manage the fund by itself. Of course, it will report to the PMO or the ministry of finance and if the PM or the finance minister is not satisfied by the performance of the team, then he can fire the team, but if there's no major conflict, the fund should be free to execute the mandate that has been given by the government and maximise its riskadjusted returns.
This is the beauty of the current government. If you asked me this question 10 years ago, it wasn’t possible because I didn't know whether we had someone in the government who had a clear enough idea or the mandate to create such a fund. There were too many low-hanging fruits that each interested party would seek to harvest.
I believe that the current government under the centralised leadership seems to be the one which can actually execute the concept of a sovereign wealth fund that can tick all the required boxes and deliver as per its mandate. If it works, we are not just creating a pool to deploy new assets, but are also taking care of the government’s current liquid and ill-liquid assets.
How can it start?
The right way to develop a new SWF will be to begin as a start-up on a smaller scale and then let it grow naturally. Start off by transferring the equity of some of the PSUs -- let's say, 4-5 PSU banks. Let the SWF raise capital to enhance its capital adequacy and dilute itself at the same time.
Transfer the government’s ownership in 5-6 PSUs to the fund so that all future dividends go to the SWF for reinvestment. It is a future asset and you create an endowment to have a well-run SWF that provides a constant stream of revenue.
Develop clear objectives and deliverables that the team running the SWF is responsible for, and measure and reward them against those objectives. If they perform well, keep transferring more and more PSUs to such an SWF and gradually broaden its role, including the right to determine their boards, which in turn would ensure they hire the best management talent at the PSUs to run them effectively, influencing the PSUs’ capital policy, dividend policy, setting strategic directions for each of the PSUs, etc.
So, this is centralised under a common set of senior leaders rather than left to each ministry.
What are the challenges of building a sovereign fund from your experience at Temasek?
The only way to be successful is by having very high quality talent and a very high quality management team which is purely professional, benchmarked against the best in the world and are paid market salaries; otherwise, you won’t attract the right talent.
Additionally, the policy makers must do what's right for the country and its citizens -- that is the single most important thing. That will be in India’s best interest since so many productive assets are under the public sector. Many of the assets are well run, but by introducing the SWF as an intermediate holding company between the government and the PSU, you separate the policy makers and management of the operating company, which is the biggest advantage in this approach.
The SWF can then decide with the government on what is the right proportion of ownership in any particular PSU --is it 100%, 51%, 49% or 26%?
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