Parekh suggests 8 per cent forex be invested abroad

The Deepak Parekh Committee has recommended that two proposed overseas subsidiaries of the India Infrastructure Finance Company be provided $10 billion and $5-6 billion, respectively, so as to channelise a part of India's $200 billion-plus foreign exchange reserves.

The $10 billion subsidiary will act as an investment firm, while the other will function as a credit insurance company.

The committee has suggested that the investment subsidiary should be allowed to borrow up to 10 per cent of the annual net accretion to the country's foreign exchange reserves. The panel said the loans to this subsidiary can be benchmarked to 30-year US government bonds. The RBI would thus get compensated for the resulting loss of liquidity.

The investment subsidiary would be able to invest in power projects in Nepal and Bhutan; part of the electricity generated will have to be supplied to India.

The company can also invest in gas pipelines till the Indian border or support Indian oil firms' overseas acqusitions.

The second subsidiary will be a monoline credit insurance company that can be set up with thin capital to provide "credit wraps" to firms for a one-time upfront fee.

The credit insurance company can raise long-term foreign currency bonds which will be subscribed by the Reserve Bank of India (RBI) out of the foreign exchange reserves. Funds raised will then be deployed in highly rated collateral securities like US government bonds. Backed by such collateral, insurance companies provide credit wrap to infrastructure firms to raise resources from international market.

The credit wrap will increase credit ratings of such projects and access to long-term capital.

Project companies will use the funds raised overseas to finance project related imports.