Govt seeks to raise Rs.5,000 cr through ETFs in fiscal 2014

 

 Mumbai: The government plans to raise at least Rs.5,000 crore through exchange-traded funds (ETFs) as a part of its Rs.40,000 crore divestment plan in the current fiscal, three persons familiar with the plan said. Goldman Sachs Asset Management (India) Pvt. Ltd has been appointed as the fund manager for the ETFs, which will be based on stocks of state-run firms, they said.

ETFs, like stocks, are listed on exchanges. They are liquid, tradable during market hours, and are issued in a dematerialized form. Typically, ETFs do not have entry or exit loads when bought on exchanges.

These instruments, however, attract costs in the form of a bid and ask spread, and brokerage charges.

India’s ETF industry is small, with gold-based ones being the most common. According to the Association of Mutual Funds in India, at the end of March, the total assets under 38 domestic ETF schemes stood at Rs.13,124 crore, with equity-oriented ones contributing only Rs.1,476 crore.

According to the plan, an index based on the shares of central public sector units (PSUs) will first be created. Index schemes will be launched based on this.

While Goldman Sachs will manage investors’ money under the proposed PSU ETF, ICICI Securities Ltd will be adviser to the department of disinvestment on the size, composition of the fund, structure and other issues involved in launching the ETF.

An email sent to Goldman Sachs did not elicit a response.

“The PSU index, on which the ETFs will be launched, will likely have stocks of only those state-run firms whose market capitalization is over Rs.3,000 crore. To begin with, the first index may be based on oil and gas, and energy sector PSU stocks, followed by mining- and construction-related stocks,” said one of the three persons cited above.

None of them wanted to be named as the government is yet to formally announce the exact PSU ETF structure and size, or name Goldman Sachs as the official fund manager.

Since January, BSE’s PSU index has underperformed the exchange’s benchmark index, the Sensex. The PSU index has lost 6.977% while the Sensex has lost 1.27%. The National Stock Exchange’s PSE (public sector enterprise) index has, however, done better. It has lost 0.56% since January, while the bourse’s Nifty index has lost 1.15%.

Goldman Sachs emerged as the winner of the mandate last week from among about half a dozen contenders in the mutual funds space.

Most of the ETFs in India are managed by Goldman Sachs Asset Management, with Goldman Sachs Nifty ETS (Rs.482.21 crore) and Goldman Sachs Liquid ETS (Rs.576.66 crore) being the two largest equity-oriented ETFs, according to Value Research India Pvt. Ltd, a New-Delhi based mutual funds tracker.

This is the first time the government will raise money through ETFs. Once launched, the PSU ETF will be the largest among all ETFs.

With Rs.3,377.04 crore assets under management, Goldman Sachs’ Gold ETF is the largest now.

One of the three persons said the fund manager for the proposed ETF has to make an upfront commitment of Rs.15 crore towards marketing, advertisement, distribution and other promotional activities.

“While this forced several fund houses to walk out of negotiations at the bidding stage, competitive fund management fees and volumes may be able to compensate for the costs incurred by the PSU ETF manager,” he added.

The government chose to dispose of its holdings in state-run firms through ETFs because it will ensure that the stocks of such firms are not manipulated or beaten down during the run-up to the divestment in PSUs. In the past, there have been instances of PSU stocks falling before the public float, making it difficult for the government to raise the targeted amount.

The government and some fund managers may have also been inspired by the success of ETFs in Hong Kong in 1999. In 1997, when many stocks crashed on the Hang Seng, the government first bought stakes in those firms and later decided to divest its holdings through ETFs to ensure that markets were not impacted.

In November 1999, under the management of State Street Global Advisors, Hong Kong launched the Tracker Fund of Hong Kong (TraHK). The $4.3 billion (around Rs.23,350 crore today) initial public offering of TraHK has been Asia’s largest ever (ex-Japan) public issue at the time.

The chief executive officer of a large domestic fund house, which withdrew from negotiations with the government in the first round, said it was not practical for the government to expect such a huge investment through ETFs at this stage.

“We withdrew in the first round. Only two fund houses were willing to apply in the final round. That says a lot,” he said.

The ETF market is still not mature in India, and unless foreign money comes in, these funds do not make much sense, he added.

“Retail investors are not coming for initial public offerings,” he said. “It’s too much to expect them to come and buy ETFs of such a large amount.”

The government needs to incentivize trading in ETFs through special tax breaks or concessions in transaction charges, said Deepak Jasani, head of research (retail) at HDFC Securities Ltd.

“Further retail investors will have to be given sufficient discount to the net asset value,” Jasani said. “In India, ETFs have not yet taken off to the extent expected due to a variety of reasons, including low liquidity, high impact costs, no alternative exit window… Further, a vibrant index futures and index options market is a good, liquid, low-cost alternative to ETF for Indians, most of whom like to trade.

ADITYA KUMAR SINGH
PGDM 2nd SEM