Promoting ETFs – The CPSE Story

The recent announcement by the Indian Finance Minister about the new Central Public Sector Enterprise (CPSE) ETF created waves of excitement and anticipation in the market and among market participants.  In order to understand and dig deeper into what this new ETF means for the Indian markets, it would be good to understand the background of the disinvestment story.

The disinvestment plan was initiated post-1991 and started with the setting up of the Department of Disinvestment and plan to start with select public sector undertakings (PSUs).  In 1991, it began with a few disinvestments and further increased to INR 21,163 cores in 2001.  The amount for fiscal year 2016-2017 was over INR 43,000 crores.  This journey of disinvestment was via various routes like Initial Public Offering (IPO), Further Public Offering (FPO), Offer for Sale (OFS), strategic sale, and ended with a revolutionary step for the country by using the route of ETFs.  VSNL was the first CPSE to be divested by way of a public offer in 1999-2000.  ONGC’s public offer in 2003-2004 was the largest CPSE FPO, raising INR 10,542 crore.  Coal India’s public offer in 2014-2015 was the largest CPSE OFS, raising INR 22,557.63 crore.  The maximum number of applications received in a PSU IPO/FPO since 2003-2004 was in CIL (15.96 lakhs)[1].  The first ETF was the Goldman Sachs CPSE ETF, which was launched on March 28, 2014, since acquired and hence managed by Reliance Mutual Fund.

ETFs formed a convenient vehicle for the government as they offered an opportunity to create a basket of stocks that market participants could invest in at a low cost and offered the flexibility of a stock along with transparency while the constituents and its prices were available live as markets traded.

The first CPSE ETF was a success and was well received by market participants.  This encouraged the Department of Disinvestment (DOD), now Department of Investment and Public Asset Management (DIPAM), to offer the market another option.  The S&P BSE Bharat 22 Index is the underlying index for the new ETF of 22 companies, including central public sector enterprises, government banks, and some holdings of the government’s investment arm SUUTI.  The new ETF will aim to help the government sell its equity stakes in those select companies and aid in moving forward in its objective to raise its disinvestment target for the current financial year.

The S&P BSE Bharat 22 Index is designed to measure the performance of the select companies that offer a well-diversified basket of PSUs with three SUUTI companies (primarily Axis Bank, L&T, and ITC), three PSBs, and is balanced across 16 other selected CPSEs.

Exhibit 1:Stocks That Form Part of the S&P Bharat 22 Index
COMPANY ENTITY SECTOR
Axis Bank Ltd SUUTI Finance
ITC Ltd SUUTI FMCG
Larsen & Toubro Ltd SUUTI Industrials
Bank of Baroda PSB Finance
Indian Bank PSB Finance
State Bank of India PSB Finance
National Aluminium Co Ltd CPSE Basic Materials
Bharat Petroleum Corp Ltd CPSE Energy
Coal India Ltd CPSE Energy
Indian Oil Corp Ltd CPSE Energy
Oil & Natural Gas Corp Ltd CPSE Energy
Power Finance Corp Ltd CPSE Finance
Rural Electrification Corp Ltd CPSE Finance
Bharat Electronics Ltd CPSE Industrials
Engineers India Ltd CPSE Industrials
NBCC (India) Ltd CPSE Industrials
Gail India Ltd CPSE Utilities
NHPC Ltd CPSE Utilities
NLC India Ltd CPSE Utilities
NTPC Ltd CPSE Utilities
Power Grid Corp of India Ltd CPSE Utilities
SJVN Ltd CPSE Utilities

Source: S&P Down Jones Indices LLC.  Data as of August 2017.  Table is provided for illustrative purposes.

The index offers a diversified sectoral balance across six sectors: basic materials, energy, finance, fast-moving consumer goods, industrials, and utilities.

To ensure that the index is well balanced, individual stock weights are capped at 15% and sector weights are capped at 20%.

The Bharat 22 ETF offers market participants another option to participate in the government disinvestment program via the ETF route.

[1] Source: DIPAM

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