BackBudget 2018: More divestment through ETFs and a debt ETF
Finance minister Arun Jaitley has said that the government will launch more debt ETFs though there is no clarity on what it would look like
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Finance Minister Arun Jaitley expressed satisfaction at the response the Bharat 22 exchange-traded fund (ETF) got from the public in November 2017. He said that more ETFs will be launched as well as a debt ETF too. Although he didn’t clarify what a debt ETF would look like, a debt ETF commissioned by the Department of Investment and Public Asset Management (formerly, the Department of Disinvestment)—the department under the Ministry of Finance that Jaitley said in his speech would commission such an ETF—would most likely solicit money from the public to fund the government’s various social sector schemes.
Shyam Sekhar, chief ideator and founder, iThought, a Chennai-based wealth management firm, says that in addition to the state-owned companies issuing bonds to the public, a debt ETF can put all these bonds into one vehicle (debt ETF) and solicit money from the public. “The government can access public money for its social welfare schemes from the public by putting together bonds of various state-owned companies into just one vehicle, the debt ETF, and then mass-sell it to retail investors. The money collected, then, goes to these companies, and later to be deployed to fund the latter’s social welfare schemes," said Sekhar. Selling these bonds through one vehicle also reduces the operating cost as the expense ratio of such a ETF is negligible. Bharat 22 ETF’s expense ratio is 0.01%; the lowest in the Indian mutual fund industry. To be sure, these underlying bonds could also be available individually and through this debt ETF, said Sekhar, or the government can specially issue bonds for the purpose of this ETF; it can choose.
Another variant of a debt ETF could also be one that comes with various government of India securities, said Nilesh Shah, managing director of Kotak Mahindra Asset Management Co Ltd. He added that the government may put its various government securities in it. “Since retail investors do not usually directly invest in government securities, they could invest in them through an ETF," he said.
In May 2014, the government disinvested its stake in a basket of 10 companies through the Central Public Sector Enterprises (CPSE) exchange-traded fund (ETF). This was the first time that the Indian government disinvested its stake in state-owned companies using the ETF vehicle.
It followed up with two subsequent follow-on offers in February and March 2017.Through this ETF, the government of India has divested stocks worth roughly Rs11,500 crore in all so far. Reliance Nippon Life Asset Management Ltd manages the CPSE ETF.
In November 2017, the government divested its stake in another basket of 22 companies, called the Bharat 22 ETF, through ICICI Prudential Asset Management Co. Ltd as the ETF’s fund manager. B22 ETF divested shares worth Rs14,500 crore, even though it got subscriptions worth Rs31,817 crore. The government returned the rest of the money to the subscribers. “The government realised that there is a lot of investor appetite and potential for such a kind of product," said Sekhar. In the past 3 years, the CPSE ETF returned 7.68%, as opposed to 8.83% by category average of large-cap funds, as per figures provided to us by Value Research. In the past year, the CPSE ETF returned 15.05%, as opposed to 29.30% by large-cap funds (category average). The details of the debt ETF are still unclear and we shall have to wait for the government as to what the final shape and structure of this product would look like.
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