IRCTC listing, CPSE ETFs to help Centre meet Disinvestment Targets

With CPSE exchange-traded fund getting huge response, the central government is confident of meeting divestment target of Rs 72,500 crore. It’s time to know about CPSE Exchange Traded Fund

NEW DELHI: After failing to meet the divestment target once again in 2016-17 – the seventh consecutive year to miss the target – the government is confident about raising Rs 72,500 crore in 2017-18 through disinvestment of public sector enterprises (PSEs).

The confidence stems from the positive response to the second tranche of CPSE Exchange-Traded Funds (ETFs) which managed to raise over Rs 9,600 crore last month.

The CPSE ETF is a fund that holds shares of ten central PSUs with maximum weight allocated to ONGC, Coal India, IOC and GAIL. Jaitley’s disinvestment exercise will target stake sale in three railway units—IRCTC, IRFC and IRCON, along with relying on the ETFs for disinvestment in major CPSEs. In the current fiscal, the government managed to raise only 66% of the revised estimate target of Rs 45,500 crore.

Often disinvestment initiatives undertaken by the government have been marked by economic expediency rather than being geared towards setting PSUs free from governmental interference. This is evidenced by the massive failure of the government in meeting its strategic disinvestment (when the government divests equity along with management control) target for the current fiscal by a huge gap of Rs 15,000 crore. Against its inflated target of Rs 20,500 crore from strategic disinvestment, the government was barely able to raise Rs 5,500 crore.

Even the 14th Finance Commission has pointed out to the tendency of the Centre in divesting stake in PSUs without granting functional autonomy, saying that the process of disinvestment over the years has been generally ad-hoc, based on the limited approach of short-term fiscal gains to cover the budgetary revenue gaps to the extent feasible, depending on market circumstances.

Economists have argued for bolder reforms in privatisation of PSUs. A January report by the National Institute of Public Finance and Policy (INIPFP) titled, ‘Public Sector Undertakings – Bharat’s Other Ratnas’ has advocated that Maharatna PSUs should be granted greater autonomy and should be commercialised.

The report chalks out a 10-year plan to divest 50% PSU assets amounting to roughly $250 million. These funds it suggests could then be parked in a strategic investment fund to leverage private funding of the same amount. This will help India in investing an additional $50 billion per year in public infrastructure for the next 10 years.

“It should be remembered that the PSUs which were strategically divested under the previous NDA government have done exceedingly well, thereby enhancing efficiency and improving the return on assets…Ad hoc expediency based on yearly targets is not going to work,” the report said.

All you wanted to know about… CPSE Exchange Traded Fund

Every Budget, the Government sets itself an ambitious target for raising cash from selling its equity stakes in PSUs. This target is more often missed than met. Two years ago, the Modi government hit upon the bright idea of selling these stakes through a specially constructed fund — CPSE Exchange Traded Fund or ETF. While the first CPSE ETF was floated in March 2014, a second tranche is set to open this week. The fund is managed by Reliance Nippon Life AMC.

What is it?

An ETF is a mutual fund whose portfolio exactly duplicates an existing index. So, the CPSE ETF holds the same basket of stocks, in the same proportion as the Nifty CPSE Index. You can expect its returns to very closely mirror the performance of this index.

Ten central PSUs make up the portfolio of the Nifty CPSE ETF. Of these, ONGC (24.3 per cent weight), Coal India (20.5 per cent), IOC (17.9 per cent) and GAIL (11.1 per cent) take up the lion’s share, while Power Finance Corp, Rural Electrification Corp, Container Corp chip in with about 5 per cent each and Bharat Electronics, Oil India and Engineers India account for 2-4 per cent. These have been shortlisted for their high dividend pay-outs. The subscriptions will be used by Reliance MF to buy equity stakes from the Centre, in the same proportion. During the offer, the CPSE ETF is available at a 5 per cent discount to prevailing market prices. But if you miss this window, the ETF is listed on the stock exchanges and you can buy or sell units in the secondary market, at the latest quoted price.

Why is it important?

When the Centre floats its disinvestment offers one at a time, the investor response is often dependent on market conditions. So if markets are soaring and the sector to which the PSU belongs is favoured, the offer gets lapped up. But if markets are downbeat the offer bombs, prompting LIC or another state institution to do the rescue act.

When the Centre disinvests through the ETF route, a bunch of PSUs can be disinvested at one shot. The offer can be timed to good market conditions with a high decibel marketing campaign. While one-off disinvestment offers so far this year have raised Rs. 400 crore to Rs. 3000 crore, the CPSE ETF expects to mop up between Rs. 5000 and Rs. 6000 crore. This can help the government inch closer to its disinvestment target of Rs. 56,500 crore for the year. A healthy mop up from disinvestment will mean lower burden on tax payers.

Why should I care?

If you’re a big fan of state-run firms, the CPSE ETF offer is a good opportunity to buy a basket of them. With a price earnings ratio of about 11 times, compared to the Nifty index’s 22 times, the CPSE basket is inexpensive too. Investors who bought into the first tranche of the CPSE ETF have made a 54 per cent return on their buy price. They also received bonus units.

But then, past performance is no guarantee of future returns. PSUs do suffer from constant government intervention in their business and pricing decisions. With nearly 74 per cent of its portfolio dedicated to energy stocks, the CPSE basket is heavily reliant on the commodity and economic cycle. With the top three stocks chipping in with over 15 per cent each, it’s a concentrated portfolio to own.

The bottomline

An investment can work out splendidly for either the seller or the buyer. So if the Government wins, you lose. And vice-versa.