Finmin may slot 25 pct of ETF for anchor investors

Written by Arup Roychoudhury | Aftab Ahmed | New Delhi | Updated: Jan 18 2014, 00:58am hrs
FinMinThere will be a discount for those retail investors who hold on to their investment for over a year.
The finance ministry is likely to earmark 25-30% of the proposed exchange-traded fund (ETF) for subscription by sovereign wealth funds (SWFs) who will come in as anchor investors.

The ETF offer for SWFs will open a day before the public offering for other institutional and retail investors, subject to approval by Sebi, official sources said. The ETF is set to be launched in late-February or early-March, said sources.

Additionally, the government is also considering sops for retail investors who invest in the ETF, which will comprise scrips of 11 public sector companies. To ensure long-term holding in the ETF, retail investors will be given what is known as a loyalty bonus. There will be a discount for those retail investors who hold on to their investment for over a year.

The idea, according to government officials, is that SWFs as anchor investors could act as a catalyst for others who will pick up the ETF units a day later. While the proposal is subject to Sebi approval, the finance ministry is already in informal talks with Singapore's Temasek and GIC and Malaysia's Khazana, said an official. Sovereign wealth funds in West Asia will also be considered for anchoring the ETF offering, the official added.

During the initial public offering, we will provide a small upfront discount to all investors, but for those retail investors who stay invested for a year or more, we will look to provide further discount of more than 5% on the units they hold, the official said, adding the final decision will be taken by a panel of empowered group of ministers headed by finance minister P Chidambaram.

The ETF will comprise shares of ONGC, Coal India, GAIL, Power Grid, REC, Oil India, Container Corp, Power Finance Corp, Indian Oil, Engineers India and Bharat Electronics. The government hopes to raise Rs 3,000 crore through the ETF, which it will hope to add to its budgeted disinvestment proceeds. Goldman Sachs will be the asset management company for the ETF.

An ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Its biggest advantage is that it provides diversification to an investor and is cheaper than investing in a fund. The brokerage fees will be same as that for trading in an individual stock. Apart from that, just like an individual stock, one can short an ETF.

As FE had reported recently, investors may remain chary about the ETF as the market cap weighted index of the stocks has underperformed the 50-share Nifty in last last three years not only in terms of capital appreciation but also total returns inclusive of reinvestment of gross dividends.

Sources say the weightage of each scrip will be decided on free-float market cap and no individual scrip's weightage will exceed 25%. For example, in terms of absolute market cap, Coal India dwarfs Power Grid Corp. But the latter will have more weightage in the fund because only 10% of Coal India's shares are publicly traded compared with 45% for Power Grid. The weightage is likely to be as follows: About 25% for ONGC, 19% for Power grid, 16% for Coal India and 13% for GAIL. Smaller companies like Engineers India and Bharat Electronics will have 1-2% weightage while others including Indian Oil and Container Corp will have in the range of 4-6%.

The official conceded the PSUs had underperformed Sensex in last one year and it may remain a challenge for them. What we are pitching for is long-term fundamentals of these companies and their dividend payment records, both of which are strong. We want them to remain invested on a long-term basis, the official said.