With
government clearing Central Public Sector Enterprises -Exchange
Traded Fund (CPSE-ETF or simply PSU-ETF), they will soon be traded
in the bourses. Before discussing the merits and success-factors of PSU-ETF, it
will be good to know what an Exchange Traded Fund(ETF) is.
Started
in 2001, there are presently 33 ETFs, like other instruments ETF is an
investment fund which tracks a certain index. They are traded on stock
exchanges similar to shares. An ETF holds assets like stocks, bonds, etc of
which it track prices.
ETFs are
different from Mutual Funds (MFs) although they both have the feature of
representing the value of investments backed, in their own prices. Firstly,
ETFs are traded like stocks unlike MFs where one gets value as per the Net Asset Value (NAV) of
the fund. So in MFs while one buys/sells Units, in case of ETF one actually
buys/sells shares of the portfolio of the ETF which explains the changes in the
price of ETF throughout the day in stock exchange. Secondly, the asset manager
of MF try to generate returns for the unit holders by beating the index (say by
investing in non-index shares), while ETF always goes in consonance to the
prices of the stock of its portfolio, hence as said ETFs don't try to beat the market they try to be the
market. Gold-ETFs
dominate Indian ETFs.
Few benefits of
ETFs over MFs which puts them in promising position in future are:
- They allow real
time buying and selling of shares.
- Lower expense
ratio, since ETFs need not to invest in liquid assets like MFs.(for
redemption of units.)
- Tax Efficiency.
CPSE-ETF
This will
comprise of shares of 11 blue chip PSU companies like ONGC, CIL, Power Grid, etc.
It’s
worth noting that this is government's way of monetizing its assets. Facing
protest in direct disinvestment of PSUs coupled with difficulty to achieve
disinvestment target of Rs. 40,000 crore this fiscal due to cold market
response, this is an alternative to direct share sale. CPSE-ETF is supposed to
raise Rs. 3,000 crore to the govt. exchequer. However there are certain
determinants which will decide the way CPSE-ETF will be received, major ones
are:
- The discount at
which they will be offered. Apparently in the past Indian market
to ETFs has been quite moved solely by the rate of discount which is
offered compared to other factors.
- Most
importantly, the way insurers will receive this ETF will have a large hand
in determining the success of it. However in my view, the scheme of
CPSE-ETF, finds itself inconsistent with the present draft rules made by
IRDA for the same. Say for example the maximum expense ratio prescribed by
IRDA rules which will be flouted as per present scheme of expenses of
CPSE-ETF, thereby setting the insurers aside.
Resolution
of these inconsistencies will pave the way for better reception of the issue.