Govt to lower cost of CPSE ETF to attract more retail investors
New Delhi 21-Aug-2015
After restructuring, the price of bundles in the ETF will come down to around Rs.36,000 from about Rs.25 lakh now.
The government is hoping to attract more retail investors to the central public sector enterprise (CPSE) exchange-traded fund (ETF) by making bundles of ETF units more affordable for them.
Investors can either buy units of the CPSE ETF at the stock exchange or purchase so-called creation units—bundles of 10,000 ETF units—directly from the fund. However, the high cost of creation puts units beyond the reach of retail investors. By bringing down their price, the government is trying to sell such units directly to retail investors.
“CPSE ETF is essentially a retail product. Because the asset management company wanted to reduce its cost, the creation unit cost came to Rs.25 lakh, which no retail investor can buy. After the restructuring of the CPSE ETF, the price of creation units will come to around Rs.36,000,” a finance ministry official said under condition of anonymity.
The official said the disinvestment department has sent the revised ETF format to the Securities and Exchange Board of India and the market regulator has agreed to it. “We expect the approval to come soon,” the official added.
Since there is more interest in bluechip stocks of public sector units, the government combined strong bluechip stocks with weaker ones to follow a new strategy for disinvestment. The CPSE ETF was launched by Goldman Sachs Asset Management India on 18 March 2014, and comprises 10 firms: Oil and Natural Gas Corp. Ltd, Gail (India) Ltd, Coal India Ltd, Rural Electrification Corp. Ltd, Oil India Ltd, Indian Oil Corp. Ltd, Power Finance Corp. Ltd, Container Corp. of India Ltd, Bharat Electronics Ltd and Engineers India Ltd.
Individual investors can invest a minimum of Rs.5,000 in CPSE ETF, while the maximum is Rs.10 lakh. Non-institutional investors and qualified institutional buyers can invest a minimum amount of Rs.10 lakh.
The move will broadbase fund holding and encourage investor participation, independent market analyst Ambareesh Baliga said. “Today, the retail investors have also moved on and are no longer of the category who invest Rs.2,000-3,000. Bringing down the value of creation units will attract high-end retail investors,” he said.
The government had offered a 5% discount to all investors during the launch. Retail investors were also offered one loyalty bonus unit for every 15 units held for a year. The fund overshot the target of Rs.3,000 crore, collecting Rs.4,400 crore and allotting units proportionately to unit holders at Rs.17.45 apiece.
However, the ETF market has not picked up in India. The first equity-linked ETF was launched in December 2001. Today, there are around 28 equity ETFs, with collective assets under management (AUM) of roughly Rs.6,500 crore.
ETFs account for about 1.2% of the total AUM of Rs.11.86 trillion in the mutual fund industry. Half the ETFs are equity-linked, the rest are mostly gold price-linked, with a couple of debt-oriented ETFs. Roughly half of the total ETF AUM rests in gold ETFs as these are a genuine alternative to buying and storing physical gold in large quantities.
In comparison, the low cost of ETFs and ease of transaction have made it attractive in developed markets such as the US. According to ICI Global, an association of regulated funds in the US, as of December 2014, the total number of index-based and actively managed ETFs, including commodity ETFs, domiciled in the US was 1,411, with total net assets of $1.974 trillion, accounting for 13% of total net assets managed by long-term mutual funds, ETFs, closed-end funds and unit investment trusts at the end of 2014.
The government has so far garnered around Rs.3,200 crore by divesting 5% stakes each in Rural Electrification Corp. Ltd and Power Finance Corp. Ltd. The finance ministry has set a target of raising Rs.69,500 crore through divestment in 2015-16, despite the government missing the previous year’s target by more than half.
While receipts from divestment have been estimated at Rs.41,000 crore, additional resource mobilization of Rs.28,500 crore has been estimated to flow from strategic disinvestments to meet the revenue shortfall following the 14th Finance Commission’s recommendations.
Disinvestment secretary Aradhana Johri last month said the overall disinvestment target is very ambitious. “It is a difficult task, but we will try to achieve it. However, I am confident that this year we will achieve the highest ever disinvestment amount,” she added.
In 2014-15, the government had set a target of Rs.63,425 crore through stake sales, of which it managed only Rs.31,350 crore, including Rs.5,000 crore from the sale of special drawing rights to the Reserve Bank of India.
The government has got clearance from the cabinet for share sales in several state-owned firms, including Rashtriya Ispat Nigam Ltd, Hindustan Aeronautics Ltd, Oil and Natural Gas Corp. Ltd and NHPC Ltd.
It also plans to sell the government’s holdings in non-government commercial entities, Specified Undertaking of UTI, Bharat Aluminium Co. Ltd and Hindustan Zinc Ltd. Johri indicated that ongoing litigation may delay sale of these residual stakes.
The government has set a target of raising Rs.55,000 crore and Rs.50,000 crore through disinvestment for 2016-17 and 2017-18, respectively, according to the medium-term fiscal policy statement.
Finance minister Arun Jaitley in his budget speech said the budget reflects considerable scaling up of divestment figures. “This will include both disinvestment in loss-making units and some strategic disinvestment,” he said. He later clarified that the strategic stake sale will not be limited to money-losing public sector units.
Jaitley said a list had been drawn up without revealing the names of the companies.
