Design it better

The Government’s decision to take the Exchange Traded Fund route for the second time, to mop up ₹5,000-6,000 crore from disinvesting minority stakes in public sector undertakings, is a good one. The ETF route is cost-effective and allows the Centre to offload stakes in multiple PSUs at one go. The launch would be well-timed, given that stocks of PSUs have soared on the bourses in the last couple of months on the back of a sharp revival in global commodity prices and hopes that the Centre will embark on big-ticket public investments to stimulate the economy, after the setback to growth from demonetisation.

Hopefully, this offer will showcase the good performance of the first CPSE ETF launched in March 2014. The fund has delivered a 36 per cent price gain since listing, almost twice the returns on the S&P BSE Sensex. Thanks to a discount at allotment and bonus units, returns for original investors in the fund are even higher, at over 70 per cent. While designing the new ETF, though, the Centre would do well to address some of the shortcomings in the structuring of its first CPSE ETF which rendered it unattractive to informed investors. For one, the portfolio featured extremely concentrated positions in large PSUs that the Centre was keen to disinvest at that point in time. This resulted in ONGC (26 per cent of assets), GAIL (19 per cent) and Coal India (17.5 per cent) hogging 62.8 per cent of the scheme’s portfolio — scarcely the diversified basket that fund investors like to own. Two, the ETF also featured an unduly high skew towards energy stocks (58 per cent) and was made up wholly of cyclical bets heavily correlated to the economy. This time around, restricting the individual stock exposures to 10 per cent each and sector weights to 25 per cent each, in line with SEBI rules for diversified equity funds, will ensure that the ETF is more investment-worthy. In this context, the idea of vesting the Centre’s stakes in private sector firms such as L&T, Axis Bank and ITC held by the Special Undertaking of the Unit Trust of India in this ETF is a good one as it would provide some diversification.

It would also help to ensure minimal portfolio overlaps between the proposed ETF and the first one, given that the latter is still available on tap to secondary market investors. In short, rather than focussing wholly on the stocks that are on the Centre’s immediate shortlist for stake sales, this ETF must include State-owned businesses that investors are likely to find attractive under current market conditions. Allowing the fund manager or lead manager to this offer to have a deciding voice in stock selection and portfolio design, would be the best bet to ensure that the offer sails through.

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