A $4 Billion Fund Is Clashing With Government. How It's Impacting Decisions

When India launched its first state-backed investment fund in 2015, the project was met with great enthusiasm. Officials hoped to raise billions of dollars to improve the nation's infrastructure and attract foreign manufacturers, angling for the success of funds started in places like Singapore.

But its lofty expectations for the National Investment & Infrastructure Fund are now in question. A chilly relationship has developed between NIIF's team and the government over investment choices, according to interviews with officials and fund managers. Critics inside and outside the government complain that NIIF - which handles about $4.3 billion in assets - lacks vision, decisiveness and the ability to win over investors.

In September, when Sujoy Bose, the fund's first chief executive, informed the board he would step down a few years before the end of his term, many saw the shakeup as evidence of frustration in New Delhi. Just a few days earlier, Finance Minister Nirmala Sitharaman, remarked at a business conference that NIIF needed to become more "robust."

"NIIF appears to have fallen between the cracks," said Vinayak Chatterjee, the chairman of CII National Infrastructure Council.

With Bose out, NIIF's defenders worry that heavy-handed government oversight could ultimately derail the fund, even though officials can't directly influence decision-making. Deep-pocketed investors from Abu Dhabi Investment Authority to Temasek Holdings Pte are backing NIIF. 

Though other sovereign funds pump money into India though direct investments, and increasingly in infrastructure and renewables, NIIF represents the first big attempt to develop a capital-raising structure on home soil. Between 2015 and Sept. 2020, NIIF made equity investments of 47 billion rupees ($568 million) and 71 billion rupees of co-investments, according to Indian news reports.

NIIF didn't respond to a request for comment or updated figures. A finance ministry spokesperson didn't respond to a text message seeking comment.

The Indian government created NIIF in late 2015 with a clear mandate: maximize economic impact through developing commercially viable projects, both greenfield and brownfield.

Officials envisioned NIIF as a board-run organization that would function like a sovereign equity fund and raise capital for India's infrastructure sector, which needs over $1 trillion in financing by 2025. The government carved out a 49 per cent stake in NIIF and committed an initial allocation of Rs 200 billion. The fund was expected to raise money from other investors who would jointly own the other 51 per cent.

Bose was also brought in as chief executive. Drawing on a 25-year stint at the International Finance Corporation, where he held a variety of capital-raising and investing roles, Bose helped recruit talent and lock-down institutional investors.

Government officials were instrumental in pitching NIIF to the world, including to a skeptical ADIA. After a five-hour meeting, where concerns from state interference to the quality of investments were discussed, ADIA was ultimately on-boarded, one person familiar with the conversation said.

Other marquee funds eventually joined, including the Canada Pension Plan Investment Board, Ontario Teachers' Pension Plan and Australian Super. Local investors like HDFC Asset Management Company Ltd., ICICI Bank Ltd. and Axis Bank Ltd. also committed capital.

Souring Relations

But the relationship between NIIF and the government took a turn in the last few years. Disagreements about resource allocation deepened during the pandemic, according to people familiar with the matter.

Politicians including Nitin Gadkari complained that money wasn't flowing to key infrastructure projects. Formal meetings between the two sides were sporadic. Since 2015, the NIIF governing council, which is chaired by the finance minister, has convened only five times. The government has recently pushed for more regular meetings.

NIIF's investments in commercial companies raised eyebrows. The fund's plan to acquire a stake in FirstCry.com, an e-commerce site for baby products, rankled the government, according to people familiar with the matter. The deal was ultimately scrapped.

Investment in Manipal Hospitals, one of India's leading hospital chains, prompted similar concerns, since it didn't directly fit NIIF's mandate to spend money on projects that attract more resources for a company or sector.

"The issue is that NIIF has tended to look at its investments predominantly through the lens of a private equity fund," Chatterjee said, even though spending was intended to align with "national economic interest and not be purely commercially return-driven."

An Uncertain Future

The government is now pushing for more sweeping change. Instead of buying assets from private equity firms, authorities want NIIF to commit to ventures that drive capital into underserved sectors.

At a recent governing council meeting in New Delhi, the government pushed NIIF to support large infrastructure projects like PM Gati Shakti, a $1.2 trillion initiative aimed at digitally linking more than a dozen ministries.

Three NIIF investors said the fund is already delivering on that front. One said over 70 per cent of the capital was, in fact, spent on infrastructure. Another added that private equity returns benefit the largest shareholder, which in this case is the government.

The direction NIIF takes may ultimately rest with Bose's successor, who is likely to be chosen in early 2023. Three investors, who were not authorized to speak to the media, worried that the fund's future is increasingly on the line. The morale inside NIIF is low. And they said top talent might leave if the government appoints an outsider rather than someone with investment experience.

NIIF generated Rs 236 million of profits for the fiscal year that ended in March, down from Rs 625 million the previous year, according to an annual general meeting in September. Bose attributed the dip to investments in expanding teams and other "one time charges."

Amit Goenka, a managing director of Nisus Finance Services Co., said it's crucial that the government and NIIF overcome "teething troubles" and settle their differences - or risk watching the whole project fizzle.

"NIIF is a key vehicle to finance the narrowing of the wide infrastructure deficit in the country," he said. "Missteps could affect the government's lofty ambitions in the sector."