India Passive Story – The Government Catalyst

Passive investing in India has experienced a remarkable growth story, and the last few years have witnessed an exponential increase in both assets and products in the region.  India is among the leading countries in terms of the rate of growth of the exchange-traded fund (ETF) market, as assets have more than doubled in the past three years.[1]  Currently, with ETF assets of over USD 5 billion and nearly 65 products, the Indian passive space seems to be geared to reach new heights.  The ETF growth that took off with the popularity of gold ETFs spearheaded to a new direction when the Indian Government announced its divestment plan via an ETF in 2013.

In 1991, the government of India made their decision on disinvestment wherein selected public sector undertakings would be chosen to divest the government majority stake.  This was not met with much success initially and to further this initiative, the government announced the ETF route.  This was a landmark decision and the first of its kind.  The first ETF was launched by Goldman Sachs in 2014 and managed to garner nearly INR 3,000 crore in assets.  Earlier this year, further tranches of the ETF were received with much interest by market participants and the ETF market now has assets of INR 5,781 crore, as of July 31, 2017.[2]

Furthermore, the Indian Government promoted the ETF industry when the Ministry of Labour and Employment announced its decision to invest 5% of its incremental flows into the Employees Provident Fund Organization (EPFO) into ETFs.  This was another major boost to the market, as being the largest provident fund in India, this was definitely good news for ETF markets.  In the first year (2015-2016), EPFO invested assets worth INR 6,577 crore, while the figure for 2016-2017 stood at INR 14,982 crore[3] across the S&P BSE SENSEX ETF and the Nifty 50ETF.  The ministry has further catalyzed the market over the years by increasing this allocation from 5% to 15%, thereby aiding the growth of assets in this space.  The change in investment norms has resulted in encouragement for other retirement funds to follow suite and further grow the rising ETF market.

The latest government catalyst has been the announcement of the second disinvestment ETF, which is aimed at contributing to the disinvestment target for the current fiscal year.  The targeted disinvestment for fiscal year 2017-2018 is pegged at INR 72,500 crores of which over INR 8,427.59 crore (as of Aug. 3, 2017)[4] has been raised so far.  The second ETF vehicle is not only aimed at being instrumental to achieving the target but will result in a further impetus to Indian ETF markets.

The announcement on Aug. 4, 2017, by the Finance Minister Mr. Arun Jaitley declared the new ETF as Bharat 22, which is based on the S&P BSE Bharat 22 Index, with Asia Index Private Limited as the index provider and ICICI Prudential AMC as the product issuer.  The S&P BSE Bharat 22 Index is designed to track the performance of select companies divested via the new ETF route by the Department of Investment and Public Asset Management (DIPAM).

As ETFs are effective, transparent, flexible, and cost-efficient investment vehicles, they can provide market participants the benefit of accessing the market via a diverse portfolio at a low cost.  They are transparent, as the underlying stocks are traded real time and their prices are available in the public domain.  ETFs are traded on an exchange similar to stocks so they offer flexibility and liquidity in an investment vehicle.

Thereby, the Indian government is offering the opportunity for market participants to access a diversified basket of select companies and participate in the disinvestment story via this ETF.

[1] Source: ETFGI

[2] Source: Value Research

[3] Source: Economic Times, May 28, 2017

[4] Source: DIPAM

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