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The insurance regulator has cleared the decks for insurers to invest in the Central Public Sector Enterprises Exchange Traded Fund, comprising scrips of 10 blue-chip state-owned firms.
The Insurance Regulatory and Development Authority (IRDA) had unveiled regulations earlier this week allowing insurers to invest in equity ETFs.
These are funds whose unit price is derived from a basket of underlying securities.
For raising fundsThe CPSE ETF, which is expected to be launched by the end of this month, would have a corpus of ₹3,000 crore and would be used as a vehicle for Government stake sale in major PSUs, including ONGC, Coal India, IndianOil and GAIL.
The move will allow the Government to raise funds from large domestic institutional investors, such as insurance companies, and ensure long-term investments through the ETF mode.
According to Life Insurance Council data, the total assets under management of life insurers stood at ₹19.40-lakh crore as on end-December 2013.
According to the draft offer document filed by the Finance Ministry with market regulator SEBI, individual investors can invest a minimum ₹5,000 and the maximum of ₹10 lakh in the fund.
Non-institutional investors or qualified institutional buyers can invest in the ETF, at a minimum investment of ₹10 lakh.
Modify regulationsTo enable insurers to invest in the CPSE ETF, the IRDA has modified the overall expense ratio to 0.50 per cent, as Goldman Sachs Asset Management, which won the bid, will charge expenses at 0.49 per cent. This is higher than the 0.40 per cent the IRDA had prescribed in its draft regulations.
The participation of large domestic institutional investors, especially insurance companies such as the Life Insurance Corporation, is crucial for a successful issue.
In a recent interview, LIC Chairman SK Roy had said the life insurer plans to invest around ₹5,000 crore, apart from ₹33,000 crore which it has already invested in equities in the current fiscal.
According to Nirakar Pradhan, Chief Investment Officer of Future Generali Life insurance, for insurers, ETFs are a good opportunity to diversify their investment portfolio, especially as insurers typically see huge inflows between January and March for tax-saving purposes.
The Government has so far raised about ₹5,094 crore through stake sales in PSUs this fiscal.
According to the revised estimates in the Interim Budget, the Government’s disinvestment target has been lowered to ₹16,027 crore this financial year from ₹40,000 crore.
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