The Cabinet Committee on Economic Affairs last week approved the setting up of a central public sector enterprises exchange-traded fund (let's call it the PSU ETF).
The Cabinet Committee on Economic Affairs last week approved the setting up of a central public sector enterprises exchange-traded fund (let’s call it the PSU ETF).
The Government hopes it will speed up the disinvestment programme, check volatility in share price movement and encourage retail participation.
These are laudable objectives. But these will not be achieved because of the basic flaw in the government strategy of piecemeal divestment. Unless the government returns to the NDA-era policy of strategic disinvestment, the investors in the proposed PSU ETF are likely to get sub-market returns.
My sense is that the ETF will come a cropper in raising money from the genuine retail public. It will fail because it is not fulfilling any investment need of the retail investor. If the retail investor wants to apply in an initial public offering of a PSU, he can very well do it. If the product you are selling does not enthuse the consumer, you are not going to get anything from him.
On the contrary , the real objective of structuring this ETF is to raise resources to support the stock prices of PSU stocks that are bound for follow-on public offer (FPO) or offer for sale (OFS). It’s a very nefarious idea.
The moment an announcement is made of an FPO or an OFS in any PSU stock, it falls like a stone. If the onus will now be on the ETF to not only prevent the stock from plummeting but also chip in, it is programmed to lose money for its investors.
Investors have historically made money in IPOs of PSUs. Since the ETF will have to follow an Index, a to-be listed stock may not find place in the Index and the ETF may be deprived of the only strategy to make money.
Existing ETFs, which are more focussed and clear in their objectives than the proposed PSU ETF have not raised any large sums of money. An ETF meant for PSU Banks, known as PSU Bank Bees, has a corpus of just Rs 8.5 crore. For a larger basket of Bank Bees, the assets under management are just Rs 41 crore.
So the only serious money the ETF may garner would be by tapping the PSU treasuries, which the North Block mandarins will most likely do. However, the limited corpus will not make the ETF a serious and a capable interceptor in times of distress.
The only way in which the investors in this ETF could make money is if the government starts a strategic sale of its companies. Ironically, then there will be no need for such an ETF in the first place.
The writer is head, private broking and wealth management, HDFC Securities.
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