PSU ETFs: Will They Pay Off?

It seems that nothing is working in favour of the UPA II government. On one hand, economic growth continued to remain subdued, and on the other, international factors like tapering and increasing crude oil prices are putting immense pressure on the economy. On the domestic front too, the pathetic state of infrastructure projects is well known, and in spite of all the efforts put in by the core team of the Prime Minister, Finance Minister and the RBI governor, not much improvement has been seen.

Another front where the government is seriously lagging behind is the ability to generate funds for capital expenditure, especially through the disinvestment of Public Sector Undertakings (PSUs). With just three months to go in the current fiscal, the government has only been able to raise just over Rs 2900 crore (including Rs 1600 raised via Power Grid’s FPO) as against the target amount of Rs 40000 crore.

Panic is building on this front and the Finance Ministry has instructed the Department of Disinvestment (DoD), the divestment arm of the Finance Ministry, to complete all its preparations for the-much awaited PSUs Exchange Traded Funds (ETFs). A top DoD official told DSIJ that the Ministry wants to generate around Rs 4000-5000 crore via ETFs, which are likely to be launched during this fiscal. “Already, all preparations have been made regarding the basket and EGoM approval is awaited on the company mix”, the official shared.

What Are PSU ETFs?

ETFs are a fabulous instrument which provides an excellent investment opportunity to investors on various underlying assets and also does away with volatility in the value of those assets. In an ETF, even without acquiring the assets themselves, investors get the benefit of appreciation in those assets. Currently, more than 30 ETF are already being traded on the exchanges, underlying assets like gold, commodity, equities etc. Due to these benefits, around a couple of years ago, Mohammad Haleem Khan, former Secretary, Department of Disinvestment, had proposed setting up of PSU ETFs to curb volatility in PSU stocks, especially before and after the disinvestment process. With that thought in mind, DoD officials are working on the nitty-gritties of PSU ETFs. Already, Goldman Sachs has been chosen as the lead manager to set up PSU ETFs.

“We have made all the preparations regarding the launch of ETFs, and if we get all clearance from the Cabinet, they can be launched in February. This may include around 20-25 PSUs stocks of listed companies, and each stock has some kind of weightage as per its stock price”, the DoD official shared. 

The DoD is working towards including both heavyweight and other PSU stocks in each basket such that volatility can be minimised and investor interest can be inculcated in the instrument. Around 45 PSU companies are listed on the stock exchange, and ETF will be constituted of the stocks of these listed companies.

One-two per cent stock of the PSU companies (stake that the government wants to divest in the company) will be transferred to the ETF to form a basket, and units will be allotted to investors. The money that will be generated by selling of ETF units will go to the government as disinvestment proceeds. Final approval on the selection of stock will come from the Empowered Group of Minsters (EGoM).

“The present bunch has been made in such a way that along with shares of Maharatna companies like ONGC, CIL, NTPC and BHEL, those of NALCO, REC, PFC, BPCL and NMDC, etc. will also be included. It will be an even mix, each stock will have a weightage, and the pricing of ETF units is also based on the stocks of companies that are included in the basket”, informs official.
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A Good Opportunity For Investors

Considering the diverse mix of PSU ETFs, it appears that they will present a decent investment opportunity for investors. The biggest benefit would be the absence of volatility from stocks, whereas the return on investment would be exactly the same. The instrument in itself will be completely liquid, and will be tradable on the stock exchange, much like PSU stocks. ETF units will be compared with the Index based on companies that the government wants to divest into. In this way, anyone can invest into high quality PSU companies via a transparent and easy-to-understand process.

The overall movement of ETF prices will be more or less the same as that of the companies’ stocks, but with lesser volatility. The response of investors, especially retail, towards Power Grid’s recent FPO has underscored their fascination for stable PSU stocks. The PSU ETFs will certainly facilitate investors’ inclination towards this group of stocks, especially in lucrative sectors like oil & gas, power, mining, capital goods and steel. These will lend stability and diversity to the portfolio on one hand, and at the same time, will make for completely liquid assets.

FY14 Disinvestment Target May Be Missed, But CIL & IOC OFS On Course

In spite of all the efforts by the government, it now seems inevitable that the disinvestment target of Rs 40000 crore set by the Finance Minister P Chidambaram for the current fiscal would be missed by a great margin. The government has generated around Rs 2900 crore so far, and even if we include the NHPC buyback proceeds of Rs 2050 crore, this figure barely reaches Rs 5000 crore.

As far as the other fund-raising avenues available to the government, IOC’s disinvestment seems difficult to materialise owing to opposition by the Ministry of Petroleum and Natural Gas and the company’s management citing poor valuations and pathetic market conditions for OFS. R S Butola, CMD, IOC told DSIJ recently, “Regarding IOC’s disinvestment, we had updated the Ministry of Petroleum and Natural Gas in the month of October itself about the time not being appropriate for the issue. I think the ministry also shares our view now”.

But the Finance Ministry seems to have a different take on this. The DoD’s preparation for IOC’s OFS is in full swing and the Finance Ministry wants to come out with the issue in the current fiscal itself. “There is no role of the company in the OFS and the government has to take a final decision. IOC’s OFS will surely come out in this fiscal itself”, informs a Finance Ministry official connected with the issue.

Coal India’s (CIL) five per cent OFS is the other feasible option available to the government. This can provide another Rs 8500 crore approximately, taking the expected disinvestment proceeds to Rs 13500 crore. “We have finalised the FPO process of CIL and it will also happen during the current fiscal, giving Rs 530 crore at the current price”, says the DoD official. The government currently holds 80.40 per cent in CIL and is looking to divest 10 per cent in the company.

Considering this, even if we include ETF funding of Rs 5000 crore in the disinvestment receipts, even then this figure barely reaches Rs 19000 crore, i.e. less than 50 per cent of the overall target. The Finance Ministry is also trying hard to sell the residual stake in Hindustan Zinc and Balco, where the government holds 29.5 per cent and 49 per cent respectively. But that process too has gone into a tizzy, as the Ministry of Mines wants to change the complicated Metal Corporation Act before the divestment but the Finance Ministry thinks otherwise. The situation has worsened so much that the Prime Minister has intervened in the matter. The FM has earlier targeted to generate around Rs 15000 crore through this residual stake sale.