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The Centre can use the CPSE Exchange Traded Fund route for future divestments if ETFs, as an innovative product, finds favour with investors. For this purpose, the Government has now put in place an open-ended ‘tap structure’ with Goldman Sachs Asset Management (GSAM), which will manage the CPSE ETF offering that hits the market on Wednesday for retail investors.
This tap structure is a new mechanism to use the CPSE ETF as a continuous mode of disinvestment. It would provide an opportunity for the Government over a period of time to take advantage of any increased demand for ETF units.
ETFs are innovative products that provide exposure to an index or a basket of securities that trade on the exchange like a single stock. They are basically an innovation to traditional mutual funds.
“If ETF units generate good momentum/ interest and subsequently there is a good demand from investors, then this can be used as a continuous mode for disinvestment,” Alok Tandon Joint Secretary in the Department of Disinvestment said.
Simply put, if demand for CPSE ETFs were to go up in the coming days, then the Government can use the same route for future divestments also. Much would depend on the demand for ETFs in India, Tandon noted.
ETFs as a mode of investment are still underutilised. Equity ETFs are still at a nascent stage in India, he pointed out.
How tap structure works? Suppose an investor comes to GSAM and offers to buy, say two lakh units of CPSE ETFs. Then the asset management company has the choice of creating new units by buying underlying shares from the market.
Rather than buying from the market, the AMC can go to the Government to buy more CPSE shares and pay the market value of the shares to the Government.
For the Government, the tap structure would be an additional mode of meeting its divestment targets. However, in the case of tap structure, units created after the new fund offering period will not be eligible for discounts, except a small tap discount, which is a small fraction of a percentage point.
The upfront discount and loyalty bonus will be available to investors only during the NFO period and not later.
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