The government, struggling to fill its disinvestment purse, has hit upon a winning idea lately — using the ETF route. Last week, a third public offer from the CPSE ETF mopped up a record ₹17,000 crore for the disinvestment kitty. In February, Bharat 22 ETF will tap the market with a ₹10,000-crore offer for the same purpose.
What is it?
In disinvestment through the ETF route, the government sells part of its equity holdings in select PSUs to a fund company which runs an ETF. An ETF or Exchange Traded Fund doesn’t have a fund manager selecting stocks but mirrors a readymade index. Once the government sells its equity stakes to the ETF, the fund company then sells units in this readymade portfolio to thousands of public investors. Each of them get to partly own the basket of PSU stocks being offloaded by the government.
The government has so far used two ETFs to pursue its disinvestment programme. The CPSE ETF, managed by Reliance Nippon Mutual Fund, tracks the Nifty CPSE Index made up of 11 PSU stocks from the energy, metals, financial services and industrials space. The Bharat 22 ETF, managed by ICICI Prudential Mutual Fund, features 22 companies drawn from 11 different sectors, with private sector firms such as L&T and ITC thrown in.
Why is it important?
So far, the government’s disinvestment offers through the ETF route have been quite a hit, while its individual PSU sales often flop. When the government offloads minority stakes in individual PSUs, the response depends heavily on the fortunes of the sector. So, a stake sale in an oil explorer may get the cold shoulder if oil prices are tumbling and an iron ore maker fetches hardly any bids when the global commodity cycle is wilting. Majority of central PSUs in India are in cyclical businesses, making individual disinvestment offers a hit-or-miss affair. Investors buying them also face higher risks from exposure to a cyclical business.
But when the government combines its minority stakes from many PSUs into a single ETF, the ETF portfolio is diversified over several sectors with an upswing in one sector compensating for the downswing in another. Investors betting even small sums of ₹5,000 on the ETF get to buy a piece of multiple businesses instead of betting their shirt on just one. In recent times, the government has also sweetened ETF deals by pricing units at a discount to the market.
Why should I care?
Buying a CPSE ETF or a Bharat 22 ETF is less risky than buying individual companies. But while buying into PSU ETFs, you must keep in mind that not all the risks related to PSU stocks can be diversified away by taking the ETF route.
One, most PSU stocks have sharply underperformed their private sector peers in recent years, owing to excessive government interference in their workings by way of frequent demands for dividends and buybacks, forced mergers and inter-company deals, to fatten up the disinvestment kitty. Two, the ETF portfolios are made up of stocks that the government is keen to sell and not necessarily those that are best buys for investors, at the time of the offer.
Three, the ETF’s portfolio can change after you buy it due to the government shuffling its list of disinvestment candidates. In the latest offer from CPSE ETF, four new companies were added to the index while three earlier ones were booted out, as their government holding was already close to 51 per cent.
The bottomline
Disinvesting through ETFs is a jackpot for the government, but it need not be the same for investors.