Govt may not issue fresh tranches for two exchange-traded funds
2 min read 09 Mar 2020, 12:50 AM ISTThe move aims to prevent the govt’s stake in NTPC, Power Grid Corporation, and PFC from falling below 51%Companies where the government owns more than 50% enjoy the status of quasi-sovereign borrowers, and the implicit government guarantee reduces their borrowing costs
PremiumNew Delhi: After raising ₹16,500 crore in the sixth edition of the central public sector enterprises exchange-traded fund (CPSE ETF) on 31 January, it may be time for a pause.
The finance ministry may not issue fresh tranches of its two ETFs in the near future to prevent the government’s stake in NTPC Ltd, Power Grid Corp. of India Ltd, and Power Finance Corp. Ltd (PFC) falling below 51%, a ministry official said.
“Though technically, these three stocks can be taken out of the ETFs and replaced with new ones, at present, good CPSE stocks are hard to find," the official said on condition of anonymity.
Mint first reported on 30 December that a reduction of government stake below 51% in these three companies may breach their agreements with overseas bond holders which requires them to be majority-owned by the government.
Companies where the government owns more than 50% enjoy the status of quasi-sovereign borrowers, and the implicit government guarantee reduces their borrowing costs. If the government stake falls below 50%, investors will seek higher yields for the additional risks they take, driving up the cost of selling bonds for these companies.
The cabinet committee on economic affairs on 20 November decided to reduce government stake in select CPSEs below 51% on a case-to-case basis, but the power ministry objected to the proposal. The official cited above said the finance ministry agreed to the objection after doing a cost-benefit analysis.
“The amount of money that we will raise, say if we go 5% below 51%, will be less than the money we have to spend to convince bond holders and pay the consent fees. The gains are not commensurate," the official added.
The department of investment and public asset management (DIPAM) on 31 January sold the sixth tranche of CPSE ETF, raising ₹16,500 crore. With 12 companies in the kitty, more than 40% of the ETF is dominated by Power Grid Corporation (20.59%) and NTPC (19.66%). In the Bharat-22 ETF, the three power ETFs together have close to 16% weightage.
“We have almost hit the 51% cap in NTPC and Power Grid, while we have a 3-4% window in PFC which can be sold separately through an offer for sale," the official said. By the end of the December quarter, the government’s stake in PFC stood at 54.96%, down from 55.37% in September quarter.
Experts have warned individuals against investing in CPSE ETF due to its highly concentrated nature, with only a few stocks in the basket. The ETF is also heavily exposed to the energy industry, which is highly cyclical. Large institutional investors tend to invest in ETFs eyeing the discounts, and exit shortly after.
The finance ministry is also aware of the limitations of ETF. “There is a lot of resistance and dislike in the market towards ETFs. They claim that you are undervaluing the shares of your own CPSEs," the official added.
Through Bharat-22 ETF, the government has raised ₹4,369 crore in 2019-20 while through CPSE ETF, it has raised ₹26,500 crore in two tranches.
The finance ministry has pared its disinvestment target for 2019-20 to ₹65,000 crore while it has garnered ₹32,964 crore so far. While NTPC’s acquisition of THDC India Ltd and North Eastern Electric Power Corp. Ltd (NEEPCO) is expected to be concluded by 31 March, the government may still fall short of the ₹65,000 crore disinvestment target for the current fiscal.
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