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Business News/ Money / Calculators/  What will Bharat 22 Index and ETF bring forth?
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What will Bharat 22 Index and ETF bring forth?

Wait for the scheme to be launched formally to know more details such as discounts and retail participation

Ramesh Pathania/MintPremium
Ramesh Pathania/Mint

After successfully divesting stocks worth roughly Rs11,500 crore, which form part of the Central Public Sector Enterprises (CPSE), the Government of India is ready with another set of stocks to divest through via Bharat 22 index. The route remains, exchange-traded funds (ETF). The government carved out these stocks to make a special index of them, called Bharat 22 Index. The ETF, tentatively called Bharat 22 ETF managed by ICICI Prudential Asset Management Co. Ltd (B22E), is expected to be launched within the next month.

The government has approved the sale of stocks through this ETF, and ICICI Prudential AMC is in the process of filing the draft scheme information document with the Securities and Exchange Board of India (Sebi) for approval. Once it gets approved by Sebi, the fund house will then launch the scheme.

What will B22E look like?  

B22E will be an ETF that will invest its entire corpus in all the stocks, and in exactly the same proportion, as they lie in the benchmark index. The S&P BSE Bharat 22 index is the ETF’s benchmark index and was specially constructed and launched in August 2017 for this purpose. This index has 22 stocks and a mix of state-owned and private sector companies (three)—ITC Ltd, Larsen & Toubro Ltd and Axis Bank Ltd. 

The first tranche of CPSE was launched in May 2014, and the government had offered a 5% discount and a loyalty bonus of an additional one unit for every 15 such units held, if you had bought the units during the new fund offer (NFO) and held on to them for a year. “We are in the process of finalizing the product features with the government, after which we will file the scheme document with Sebi for approval," said Chintan Haria, fund manager and head-product development & strategy at ICICI Prudential AMC. Haria added that discounts and other incentives, if any, will be decided by the government at the time of the ETF’s launch.

The existing CPSE ETF has collected around Rs11,500 crore in its three tranches. CPSE gave a discount of 5% in May 2014 for an issue size of Rs3,000 crore, a 5% discount in February 2017 for the first follow-on offer (Rs6,000 crore), and a 3.5% discount for the second follow-on offer in March 2017 for an issue of Rs2,500 crore. The incentives for B22E will be announced at the time of launch.

Although CPSE ETF was well received, it was concentrated. It had just 10 stocks and the energy sector constituted, and still does, nearly 70%. The Bharat 22 index, and by virtue B22E, has a cap of 15% for a single scrip and 20% for a sector. The fund house and the Ministry of Finance (in charge of disinvestment) came up with a list of 22 stocks, from among what Haria says is a wider list that the government wants to disinvest in. A special attraction of Bharat 22 index is also the presence of the three private sector companies mentioned above, in which the government holds shares. But why has the government been holding shares of private sector companies and why does it now want to sell them?

In 2001, Unit Trust of India, India’s then-largest mutual fund, suspended the redemptions of its flagship scheme US-64 for 6 months, on account of its weak financials. It was mayhem in the financial markets as tales of mismanagement came out of the fund house, not just in US-64, but all of its assured return schemes, which led to a near collapse of the fund house. The fund house didn’t have the money to pay its unit holders despite the assurances. The government stepped in with a massive bailout package of around Rs14,541 crore. In simple words, it took over all the shares and securities of all of Unit Trust of India’s assured return schemes and transferred money to the fund house so that it could pay its unit holders. In 2002, the government split the fund house into two—Special Undertaking of the Unit Trust of India (SUUTI) and UTI Asset Management Co Ltd. SUUTI eventually issued bonds with the money it got from the government and paid off its investors. UTI Asset Management Co. Ltd became a Sebi-registered fund house, just like all other fund houses. 

Meanwhile, the government—which became a shareholder in all the SUUTI stocks—benefited from the bull run of 2003-07 and more than recovered the money it had given to Unit Trust of India. Part of its windfall was due to the rising share prices of ITC, Larsen & Toubro and Axis Bank—three of the many shares that once belonged to Unit Trust of India.

Now, using B22E, the government wants to sell some of its stakes to raise money for its various infrastructure and welfare programmes. B22E’s expense ratio would be one basis point. CPSE ETF’s expense ratio is six basis points. 

India is the second country in the world where the government disinvested its stake in companies using ETF as a vehicle. In November 1999, Government of the Hong Kong Special Administrative Region disinvested its stakes in several companies that were listed on the Hong Kong stock market. State Street Global Advisors Asia Ltd was appointed as the fund manager of this fund, called Tracker Fund of Hong Kong (TraHK). TraHK’s performance has been good. According to Morningstar, TraHK returned 7.74% in the past 3-year period, as compared to 7.26% returned by a comparable category of equity funds that Morningstar classifies as Hong Kong Equity. In the past 5-year period, TraHK returned 10.33%, as compared to 9.65% returned by Hong Kong Equity group. 

It’s too soon to give our verdict; we will wait for the scheme to formally launch after getting the necessary Sebi approvals. But there’s a buzz in the market. “The presence of ITC, Larsen & Toubro and Axis Bank Ltd in B22E is good," said Shyam Sekhar, chief ideator and founder, iThought, a Chennai-based wealth management firm. “Firstly, the mix of private sector companies and state-owned firms is good, as against the CPSE index, which just had the latter. Secondly, the three stocks’ entire shareholding is publicly-owned (other than that of promoters; also called free float) as there are no promoters there. Given that they are a part of the mainstream indices, S&P BSE Sensex and CNX Nifty, their high free-float means that they have a greater say in determining which way these indices move". 

The fact that the three SUUTI stocks are part of the Sensex and the Nifty would lead to greater synergies with the markets, said Deepak Chhabria, chief executive officer and director, Axiom Financial Services Ltd, a Bengaluru-based distributor of financial products. “This is better than CPSE, which was too concentrated over the energy sector," he added.

But there are concerns. “It’s (Bharat 22) still fairly concentrated. I wouldn’t say it’s suited for retail investors. Those who can read state-owned companies well can go for it. Else, those who want passive fund management, can go for a plain-vanilla and diversified ETF," said Kaustubh Belapurkar, director, fund research, Morningstar India. 

Watch out for a detailed product crack once the B22E is launched. 

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Published: 19 Sep 2017, 05:00 PM IST
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