Disinvestment ETF of Central Public Sector Enterprises to provide investors exposure to ten major listed PSUs
Over the next few days, investors will be able to buy India’s top public sector companies for a small investment of Rs 5,000. The much-touted ‘disinvestment ETF’ of Central Public Sector Enterprises will provide investors exposure to ten major listed public sector companies including oil & gas producers ONGC and GAIL and mining major Coal India Ltd.
By bundling ten of its top-rated companies into an exchange traded fund (ETFs), the government intends to pool in around Rs 3000 crore before the end of this fiscal.
The roll-out of Central Public Sector Enterprises (CPSE) ETFs is primarily aimed at bringing down government’s stake in public sector undertakings and also shore up more revenues this year. Till date, the government has raised over Rs 3,500 crore by way of stake dilution – mainly through the offer-for-sale route. The government has also lowered its divestment target for this year to Rs 16,027 crore from Rs 40,000 crore marked in last year’s budget.
Apart from raising the much-needed funds to bridge national deficits, the ETF issue will immensely help several listed PSU companies to reduce promoter shareholding -- in this case, government shareholding in state-owned companies. This follows a Sebi statute, which mandates all listed companies to have at least 25 per cent public holding.
There are over a dozen PSUs which have to meet the minimum public holding guidelines – the big ones being companies like Hindustan Copper, MMTC, State Trading Corporation and Coal India, where the government still holds around 90 per cent equity.
“Disinvestment ETF is an easier route for the government to reduce its stake in public sector companies. The offer-for-sale route involves cumbersome processes like preparation of offer documents for each and every company and then marketing all of them. An ETF is a one-shot programme to dilute stake and raise funds,” said the head of a merchant banking firm that was roped in by the government to structure the issue.
The Offering
An exchange traded fund (ETF) is created on a basket of securities and involves major companies that are present in the listed space. The fund will be listed on stock exchanges and would be compared against CPSE Index, a new equity index with stocks identified for disinvestment. Indian Oil Corporation, Bharat Electronics, Oil India, Power Finance Corporation, Rural Electrification Corporation, Container Corporation of India and Engineers India are the other seven stocks that will be a part of the proposed disinvestment ETF.
The issue will attract a lot of investors if priced properly. The government will have to offer discounts to investors. Such options will bring in long-term investors into the fund. The asset manager will also have to take care of the liquidity part; it’ll need some market-markers initially,” says veteran stock broker Anand Rathi.
The ETF will be managed by Goldman Sachs Asset Management, which has been appointed as the sole fund manager to the government’s disinvestment ETF programme. The arrangement is such that Goldman Sachs will raise funds in the ETF scheme and then approach the government for shares – as per stock weightage in the CPSE index.
The product has been categorised as a high-risk investment product by the asset manager, mainly because of its strong exposure to equities market. Retail investors can participate in the issue with a minimum investment amount of Rs 5,000.
The issue can also be subscribed by qualified institutional buyers, whose investment threshold starts above Rs 10 lakh. Almost 30 per cent of the issue has been set aside for anchor investors, who will have to invest a minimum of Rs 10 crore to participate in the issue.
Discounts Galore
In its bid to generate more investment interest, the government will offer discounts and loyalty bonuses to retail investors who are subscribing to the issue in the NFO phase.
The government intends to offer a discount (a percentage of reference market price of the underlying CPSE Index shares) to investors in the ETF programme. Most probably, the discount would be in the form of more units – for example, if the government announces a 5 per cent discount rate, an investor investing Rs 100 will get ETF units worth Rs 105.
The government will also offer loyalty bonus to NFO investors who stay invested in the fund for 12 months from the date of NFO. Loyalty bonus will be in the form of additional ETF units for a specific number of units held for 12 months.
Motilal Oswal (BW Archives)
“I think the issue will sail through comfortably,” says Motilal Oswal, CMD of the of the eponymous financial services firm.
“The quality of stocks in the basket is very good; these are all well-managed government companies with decent performance track record. Also these are dividend paying companies; investors staying in the scheme for long may also benefit from dividend payouts of these companies,” he says.
According to sources close to the issue, combined dividend payout of all the ten stocks in the ETF structure comes to around 3 per cent annually.
Merchant bankers associated with disinvestment ETFs expect the issue to evince good retail interest. That said, the government will not extend fund mobilisation (through this issue) beyond Rs 3,000 crore.
“The government wants to regulate the float of its shares in the market. If the supply is more, it will distort share price significantly,” a merchant banker working on this issue told Businessworld.
The government intends to complete the entire subscription phase towards the end of this fiscal. However, the listing of ETF units will be done only in the next financial year – most probably first week of April. A premium listing will give savvy investors an opportunity to sell the units on debut and make some quick bucks. But such a strategy will rob them off their right to earn loyalty bonus units.
Disinvestment ETF scheme is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme (RGESS), where eligible investors are entitled to tax benefits under section 80CCG of the Income-tax Act.
The RGESS is only for first-time equity investors – that is, you should not have invested in equities or any other related products before November 2012. If you hold units in an equity mutual fund, you are eligible to invest in it under the present rules. Also, if you have a demat account, but have not used it for transactions before the specified date, you can avail of the RGESS benefits. Besides, only those whose gross annual income is up to Rs 12 lakh can invest in RGESS.
“Disinvestment ETF is a good product for long-term investors as they will be able to buy ten quality PSU stocks at one go. Also, some of the stocks in the ETF basket are really under-valued and are good buys at this point in time. We’re kind of sure, the PSU pack will play catch up over the next few months,” S. Ranganathan, head of research at LKP Securities.
The BSE PSU Index is down 14 per cent over the past one year.
The Energy Pack
Out of the ten stocks included in the ETF basket, five are energy-related companies. The fortunes of energy sectors (that is oil & gas sector) will decide the nature of gains (or losses) that investors will make investing in disinvestment ETFs. The BSE Oil & Gas Index has gained just about 2 per cent since last year.
India Ratings has maintained a stable outlook on the oil and gas sector for financial year 2015 (FY15) -- for both public and private sector companies. Indian refiners are unlikely to have GRMs in excess of $8 per barrel, as was seen for the major part of FY'13, while at least a quarterly GRM falling below $7 is not a remote possibility, the India-Ratings report said.
“There have been a lot of reforms in the energy sector over the past few years and these have turned beneficial for the sector,” says Ranganathan of LKP Securities.
“The sector has not done all that well over the past couple of years; that said, we cannot rule out a sector rotation. A rally in PSU counters may spur these stocks to higher levels. There’s enough steam left in the energy pack to move up the stock price chain,” he adds.
The best feature of this (disinvestment ETF) issue is that the government has not clubbed along less popular and loss-making PSUs like HMT, HAL and FACT, as was the plan earlier. If the current offering is a success, it would be safe to assume, the government will roll out more such schemes in the future.
Over the next few days, investors will be able to buy India’s top public sector companies for a small investment of Rs 5,000. The much-touted ‘disinvestment ETF’ of Central Public Sector Enterprises will provide investors exposure to ten major listed public sector companies including oil & gas producers ONGC and GAIL and mining major Coal India Ltd.
By bundling ten of its top-rated companies into an exchange traded fund (ETFs), the government intends to pool in around Rs 3000 crore before the end of this fiscal.
The roll-out of Central Public Sector Enterprises (CPSE) ETFs is primarily aimed at bringing down government’s stake in public sector undertakings and also shore up more revenues this year. Till date, the government has raised over Rs 3,500 crore by way of stake dilution – mainly through the offer-for-sale route. The government has also lowered its divestment target for this year to Rs 16,027 crore from Rs 40,000 crore marked in last year’s budget.
Apart from raising the much-needed funds to bridge national deficits, the ETF issue will immensely help several listed PSU companies to reduce promoter shareholding -- in this case, government shareholding in state-owned companies. This follows a Sebi statute, which mandates all listed companies to have at least 25 per cent public holding.
There are over a dozen PSUs which have to meet the minimum public holding guidelines – the big ones being companies like Hindustan Copper, MMTC, State Trading Corporation and Coal India, where the government still holds around 90 per cent equity.
“Disinvestment ETF is an easier route for the government to reduce its stake in public sector companies. The offer-for-sale route involves cumbersome processes like preparation of offer documents for each and every company and then marketing all of them. An ETF is a one-shot programme to dilute stake and raise funds,” said the head of a merchant banking firm that was roped in by the government to structure the issue.
The Offering
An exchange traded fund (ETF) is created on a basket of securities and involves major companies that are present in the listed space. The fund will be listed on stock exchanges and would be compared against CPSE Index, a new equity index with stocks identified for disinvestment. Indian Oil Corporation, Bharat Electronics, Oil India, Power Finance Corporation, Rural Electrification Corporation, Container Corporation of India and Engineers India are the other seven stocks that will be a part of the proposed disinvestment ETF.
The issue will attract a lot of investors if priced properly. The government will have to offer discounts to investors. Such options will bring in long-term investors into the fund. The asset manager will also have to take care of the liquidity part; it’ll need some market-markers initially,” says veteran stock broker Anand Rathi.
The ETF will be managed by Goldman Sachs Asset Management, which has been appointed as the sole fund manager to the government’s disinvestment ETF programme. The arrangement is such that Goldman Sachs will raise funds in the ETF scheme and then approach the government for shares – as per stock weightage in the CPSE index.
The product has been categorised as a high-risk investment product by the asset manager, mainly because of its strong exposure to equities market. Retail investors can participate in the issue with a minimum investment amount of Rs 5,000.
The issue can also be subscribed by qualified institutional buyers, whose investment threshold starts above Rs 10 lakh. Almost 30 per cent of the issue has been set aside for anchor investors, who will have to invest a minimum of Rs 10 crore to participate in the issue.
Discounts Galore
In its bid to generate more investment interest, the government will offer discounts and loyalty bonuses to retail investors who are subscribing to the issue in the NFO phase.
The government intends to offer a discount (a percentage of reference market price of the underlying CPSE Index shares) to investors in the ETF programme. Most probably, the discount would be in the form of more units – for example, if the government announces a 5 per cent discount rate, an investor investing Rs 100 will get ETF units worth Rs 105.
The government will also offer loyalty bonus to NFO investors who stay invested in the fund for 12 months from the date of NFO. Loyalty bonus will be in the form of additional ETF units for a specific number of units held for 12 months.
Motilal Oswal (BW Archives)
“I think the issue will sail through comfortably,” says Motilal Oswal, CMD of the of the eponymous financial services firm.
“The quality of stocks in the basket is very good; these are all well-managed government companies with decent performance track record. Also these are dividend paying companies; investors staying in the scheme for long may also benefit from dividend payouts of these companies,” he says.
According to sources close to the issue, combined dividend payout of all the ten stocks in the ETF structure comes to around 3 per cent annually.
Merchant bankers associated with disinvestment ETFs expect the issue to evince good retail interest. That said, the government will not extend fund mobilisation (through this issue) beyond Rs 3,000 crore.
“The government wants to regulate the float of its shares in the market. If the supply is more, it will distort share price significantly,” a merchant banker working on this issue told Businessworld.
The government intends to complete the entire subscription phase towards the end of this fiscal. However, the listing of ETF units will be done only in the next financial year – most probably first week of April. A premium listing will give savvy investors an opportunity to sell the units on debut and make some quick bucks. But such a strategy will rob them off their right to earn loyalty bonus units.
Disinvestment ETF scheme is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme (RGESS), where eligible investors are entitled to tax benefits under section 80CCG of the Income-tax Act.
The RGESS is only for first-time equity investors – that is, you should not have invested in equities or any other related products before November 2012. If you hold units in an equity mutual fund, you are eligible to invest in it under the present rules. Also, if you have a demat account, but have not used it for transactions before the specified date, you can avail of the RGESS benefits. Besides, only those whose gross annual income is up to Rs 12 lakh can invest in RGESS.
“Disinvestment ETF is a good product for long-term investors as they will be able to buy ten quality PSU stocks at one go. Also, some of the stocks in the ETF basket are really under-valued and are good buys at this point in time. We’re kind of sure, the PSU pack will play catch up over the next few months,” S. Ranganathan, head of research at LKP Securities.
The BSE PSU Index is down 14 per cent over the past one year.
The Energy Pack
Out of the ten stocks included in the ETF basket, five are energy-related companies. The fortunes of energy sectors (that is oil & gas sector) will decide the nature of gains (or losses) that investors will make investing in disinvestment ETFs. The BSE Oil & Gas Index has gained just about 2 per cent since last year.
India Ratings has maintained a stable outlook on the oil and gas sector for financial year 2015 (FY15) -- for both public and private sector companies. Indian refiners are unlikely to have GRMs in excess of $8 per barrel, as was seen for the major part of FY'13, while at least a quarterly GRM falling below $7 is not a remote possibility, the India-Ratings report said.
“There have been a lot of reforms in the energy sector over the past few years and these have turned beneficial for the sector,” says Ranganathan of LKP Securities.
“The sector has not done all that well over the past couple of years; that said, we cannot rule out a sector rotation. A rally in PSU counters may spur these stocks to higher levels. There’s enough steam left in the energy pack to move up the stock price chain,” he adds.
The best feature of this (disinvestment ETF) issue is that the government has not clubbed along less popular and loss-making PSUs like HMT, HAL and FACT, as was the plan earlier. If the current offering is a success, it would be safe to assume, the government will roll out more such schemes in the future.
