Well-packaged

After much trial and error, the Government finally seems to have hit upon a winning idea to disinvest minority stakes in public sector undertakings — the ETF (Exchange Traded Fund) route. Enthused by the ₹8,500 crore it managed to raise via the second tranche of the CPSE ETF in FY17, it has now announced plans for a new fund — the Bharat 22 ETF. There’s no doubt that ETFs present a superior alternative to the earlier method of PSU stake sales through a series of follow-on offers and offers for sale in the market. Frequent visits to the market by disinvestment candidates led to an oversupply of public sector paper and made for sub-optimal timing of the issues and depressed valuations, as their stock prices were inevitably hammered in the run-up to such offers. The ETF route allows the Centre to sidestep these issues through a one-shot offer.

In designing the Bharat 22 ETF, it is also good to see the Centre finally structure a portfolio that balances its own choice of disinvestment candidates, with what makes investment sense for the shareholder. The Bharat 22 portfolio has three clear points of difference with the earlier CPSE ETF. One, with 22 firms drawn from six different sectors, this fund offers a more diversified, mutual fund-like basket to retail investors. One of the key minus points of the earlier CPSE ETF was its unduly heavy exposure of over 62 per cent in the public sector energy giants, with marginal weights in other firms. This sector concentration made it quite a risky portfolio to own. Bharat 22 plans to maintain its individual stock and sector weights at about 15 per cent and 20 per cent respectively, with an annual rebalancing feature. Two, instead of packing the portfolio with cyclical businesses as its predecessor did, this ETF blends sectors with secular growth prospects (FMCG and utilities), and cyclical ones (energy, metals, industrials). This should help smoothen out the return experience to investors. The addition of equity stakes held by the SUUTI in private sector blue-chips such as L&T, Axis Bank and ITC helps sweeten this offer and should help Bharat 22 garner better response than the CPSE ETF did.

However, the Government must bear in mind that far more than good packaging is needed to render the State-owned firms an attractive proposition to public market investors. Seasoned investors in India are often wary of betting on PSUs owing to the Government’s unwillingness to allow them to operate on wholly commercial lines. Whether it is subjecting them to irrational dividend and buyback norms, or structuring deals such as the recent ONGC-HPCL merger to appropriate their cash coffers, the Centre has not proved itself a model promoter. Repairing this investor-unfriendly image is critical for State-owned firms to command valuations that match their private sector peers, and befit their size and market position.

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