Beyond smart packaging

It is good to see the Centre’s latest disinvestment gambit through the Bharat 22 Exchange Traded Fund get off to a flying start, with the anchor investor portion attracting a six-fold over-subscription. Part of the enthusiasm for this 22-stock basket can no doubt be traced to the timing of this offer during a euphoric phase in the stock market. Investors have a well-known tendency to pile on to an asset class based on its high recent returns. The Sensex has jumped 22 per cent in the past year and the S&P BSE Bharat 22 Index, the benchmark that this ETF mirrors, sports a 22.5 per cent return. The Centre may thus be well-placed to meet its ₹8,000-crore target, with room for a green-shoe option as well.

For the Centre, which is constantly in the market to shed minority stakes in public sector undertakings, the ETF route has distinct advantages over piecemeal stake sales. Bundling PSUs into an ETF protects the individual shares from targeted speculative selling in the run-up to disinvestment offers. One-shot disinvestment is also cost-effective, reduces investor fatigue and can be more easily timed to favourable market conditions. Of course, the Centre and the asset manager for this ETF (ICICI Prudential) also deserve some credit for learning from the mistakes of earlier offers and structuring the Bharat 22 ETF portfolio to make it a more attractive package. One of the key drawbacks of the CPSE ETF used for previous rounds of disinvestment was its unduly heavy weights (16 to 23 per cent) in individual stocks and its 73 per cent exposure to the energy sector, which rendered it quite risky for investors. The Bharat 22 ETF offers a spread of 22 stocks from six sectors, with a prudential exposure limit of 20 per cent in each sector and 15 per cent on each stock. The addition of private sector bluechips and banks to the mix of industrial PSUs also makes for more secular growth prospects for the Bharat 22 ETF.

But subscriptions aside, it is important for the Government to keep in mind that the success of its disinvestment programme will depend on the return experience that the Bharat 22 and CPSE ETFs deliver to their subscribers. The CPSE ETF has managed to deliver a near 70 per cent gain to its original investors till date, but only with considerable help from fortuitous timing (March 2014) and sweeteners such as a 5 per cent discount and 1:15 bonus. Shorn of these add-ons, it has struggled to keep pace with the Sensex in the last three years. For PSUs to deliver investor wealth in the long run, good governance practices matter more than smart packaging. In recent years, state-owned firms have been made to cough up high dividends, enter into complex cross-holdings and make political appointments to their boards, undermining their credibility with public investors. The Centre should remedy these practices as it leans more heavily than ever on its disinvestment programme to balance the fisc.

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