The first Exchange Traded Fund (ETF) of Central Public Sector Enterprises (CPSE) is set to hit the market soon thereby providing investors an opportunity to take exposure into the 10 major listed public sector companies . The new offer will add to the long list of ETFs which has been dominated by Gold ETFs so far.
While the government recently approved the ETF plan for the PSUs, the CPSE ETF is an open-ended fund and the units would have a face value of Rs 10 per unit. According to the draft offer document filed by the finance ministry with market regulator Sebi, individual investors can invest a minimum of Rs 5,000 and the maximum of Rs 10 lakh in the fund. Non-institutional investors or qualified institutional buyers can invest in the ETF with a minimum investment amount of Rs 10 lakh.
The launch of the CPSE ETF is mainly aimed at monetising governments stake in PSUs so as to meet the disinvestment target of FY14. The government has, so far, raised about Rs 5,093.87 crore through stake sales in PSUs. As per the revised estimates in the Interim Budget, the target was lowered to Rs 16,027 crore in this financial year from Rs 40,000 crore.
While the ETF, which is expected to hit the markets this month, it could fetch government Rs 3,000 crore. The fund will provide a new option to investors looking at putting their money in public companies indirectly.
What is ETF?
An ETF is similar to that of a mutual fund but trades like a stock on an exchange. The CPSE ETF will be listed in the National Stock Exchange and the Bombay Stock Exchange. Investors will be able to buy and sell units of the ETF, which will give them exposure to a basket of the 10 CPSE stocks.
ETFs were introduced in India in 2001. Currently, there are about 33 ETFs with assets under management of close to Rs 11,500 crore held by 6.2 lakh investors.
The ETF basket
The asset management company for the ETF is Goldman Sachs Asset Management (India) Private Limited. There are 10 stocks in the ETF basket, namely ONGC, Coal India, GAIL, Rural Electrification Corporation, Oil India, Container Corporation of India, Power Finance Corporation, Indian Oil Corporation, Engineers India and Bharat Engineering. Earlier, Power Grid Corporation was also in the basket but it has been dropped as the scrip has a one-year lock-in period since its follow-on public offer in December.
While several public sector companies own natural resources and have generated good returns for investors over the last 30 years, they also have high dividend payout, providing one more reason to the investors to invest in them. The fund will also qualify for tax exemption under the Rajiv Gandhi Equity Savings Scheme (RGESS) and offer tax exemption for first-time investors in equities.
Unit holders who wish to avail of the tax deduction under the scheme will be subject to lock-in-periods fixed lock-in and flexible lock-in as specified under the notified RGESS. The fixed lock-in-period shall commence from the date of purchase of such units in the relevant financial year and end on March 31 of the year immediately following the relevant financial year. The flexible lock-in period will be of two years beginning immediately after the end of the fixed lock-in period.
Fund managers of the CPSE ETF will be allowed to invest up to 10 per cent of the Rs 3,000 crore corpus in derivative products like stock futures and interest rate swaps.
The draft prospectus, filed by the finance ministry with the Sebi, says, The scheme may invest in derivative products like stock index futures, interest rate swaps, forward rate agreements or other derivatives .
Derivatives are financial products, like futures, options or warrants, whose value is derived from the value of the underlying asset.
The notional exposure of the scheme in derivative instruments shall be restricted to 10 per cent of the net assets of the scheme. The combined exposure of equity shares, debt securities and gross notional exposure of derivatives instruments shall not exceed 100 per cent of the net assets of the scheme, it said.
The investment in derivative products, it said, would help the fund managers to protect the value of portfolio and enhance the unit holder interest.
Should you invest?
Government-owned companies are fundamentally strong but heavy regulations affect their performance. However, with stable government and better economic policies, the stocks tend to pick up very quick and are advised for long-term investors.
The performance of the PSU index at the Bombay Stock Exchange over the last few years has not been very encouraging. While the Sensex has risen by 16.4 per cent between January 2010 and January 2014, the PSU index at BSE has fallen by 41 per cent in the same period showing the bad performance of PSUs over the period marred by policy paralysis.
While PSUs have significantly underperformed, a lot of these companies are trading at significant discounts and a change in the overall economic environment may see them outperform going forward. Investors can look to get into the ETF with an investment horizon of 3-5 years.