Nifty firms may get priority in central public sector ETF

CPSE ETF may comprise PSU stocks initially and emulate the Hong Kong Tracker; move  to help diversify investor base
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First Published: Thu, Nov 15 2012. 09 21 PM IST
A file photo of an SBI branch. Photo: Pradeep Gaur/Mint
A file photo of an SBI branch. Photo: Pradeep Gaur/Mint
Mumbai: The proposed exchange traded fund (ETF) for central public sector enterprises (CPSEs) may initially comprise stocks of public sector units from the Nifty basket with a view to ensuring liquidity and returns for investors, said a person familiar with the development.
There are 10 CPSEs including Oil and Natural Gas Corp. Ltd, Coal India Ltd and NTPC Ltd among the top Indian firms in terms of market capitalization.
While the initial corpus has not been decided yet, the department of disinvestment (DoD) is keen on launching the ETF by March 2013, said the person, requesting anonymity.
An ETF comprises a basket of assets (stocks, commodities, etc.) which trades on an exchange like a stock and tracks an index.
The CPSE ETF may also emulate the Hong Kong Tracker, said a senior DoD official who did not want to be named. In 1999, the Hong Kong government launched an ETF to diversify the investor base and prevent a further fall in stock prices, as had occurred during the 1998 Asian financial crisis when many foreign institutional investors (FIIs) pulled out.
“A lot of large cap companies in India are controlled by the government; so it is easy to emulate the Hong Kong Tracker model,” said the DoD official.
As of 31 October, according to the DoD website, 50 CPSEs had a market capitalization of Rs.12.5 trillion—around 19.32% of the total market capitalization.
The Hong Kong Tracker closely follows the Hang Seng Index.
Similarly, in India, discussions are expected to be held with the stock exchanges and market regulator, the Securities and Exchange Board of India, or Sebi.
Vineet Arora, executive vice-president at ICICI Direct, the retail arm of ICICI Securities Ltd, which is designing the product, said the government is keen on the launch of the ETF “and we are working closely with them. The process of advising on the launch of ETF includes advising on the underlying basket”.
However, the ETF launch is being delinked from the Rs.30,000 crore disinvestment target. “The idea is to liquidate stake easily with minimal impact on the stock price and market,” the person cited above in the first instance said.
Usually, when the government announces its plan to disinvest through instruments like an initial public offer (IPO) and follow on public offer (FPO), the shares have to be issued at a discount.
“However, once the market gets a whiff, the actual stock price dips further and valuation gets affected,” the person said.
This implies that if the government is in need of money and wants to divest only a little, ETF can be an instrument that could provide continuous liquidity.
“Although there is very little to divest, such stocks will have a lot of appeal for long-term investors and will help in reducing volatility,” the person said, adding the ETF basket is likely to have stocks that have little headroom for divestment, like public sector bank stocks. For instance, State Bank of India and Punjab National Bank are large-cap banks.
However, ETFs are still new to Indian retail investors.
“Most are aware only about gold ETFs. A PSU-centric ETF is certainly going to increase the bandwidth for disinvestment, but is not likely to be a big success,” said Dhirendra Kumar, chief executive at India Value Research Pvt. Ltd.
As on 12 November, there were 32 ETFs listed on National Stock Exchange of India Ltd (NSE) and 13 on BSE.
The most popular ETFs in terms of volume include Kotak Nifty, Goldman Sachs Gold Exchange Traded Scheme (also known as Goldbees) and Goldman Sachs Liquid ETF.
Goldbees, the most popular gold ETF, registered a daily average trading volume of 75,600 units over the past one year while 8,970 units of Kotak Nifty were traded daily during the same period.
As far as PSU-specific funds are concerned, the assets under management are very small.
According to Value Research, PSU-centric funds manage less than Rs.1,000 crore of equity assets.
There are some other ETFs as well which have an underlying theme such as banks, real estate or oil and gas companies. The Kotak PSU Bank ETF is one such example. “PSU bank ETFs are not very popular and have not done very well,” said Kumar.
According to NSE, on the day of the Dhanteras festival (11 November), the exchange recorded its highest-ever traded value on a single day in gold ETFs (Rs.1,337 crore), more than double compared with last year (Rs.636 crore). Gold ETF units worth 4,441 kg were traded.
But there are some analysts who feel the CPSE ETF has a better chance of success with institutional investors.
“The ETF will not only offer a bouquet of public sector companies which are actively traded but will also help FIIs bypass their investment limits as the ownership of stocks will still rest with the fund,” said Mahendra Kumar Jajoo, chief investment officer at Pramerica Mutual Fund.
Jajoo said several institutional investors like Life Insurance Corporation of India and General Insurance Corporation of India may show interest in the ETF.
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First Published: Thu, Nov 15 2012. 09 21 PM IST
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