Govt planning new ETF with SUUTI, PSU stakes

Written by Arup Roychoudhury | New Delhi | Updated: Aug 18 2014, 06:42am hrs
ETFA final decision on the plan is yet to be taken by finance minister Arun Jaitley.
While last year the Centre raised about R5,600 crore by sale of a chunk of its shares in Axis Bank held through SUUTI, it is eyeing a mop-up of R6,500 crore this year by launching an exchange-traded fund (ETF) based on a basket of its equities in some private and government firms.

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Sources familiar with the matter told FE that the finance ministry is evaluating the option of asking an investment banker to launch a closed-ended ETF on its behalf. The proposed fund will invest in stocks of Axis Bank, Larsen and Toubro (L&T) and ITC (two other private companies where the government holds shares through SUUTI) and a clutch of central PSUs, the sources said.

A final decision on the plan is yet to be taken by finance minister Arun Jaitley.

If the plan materialises, the government would end up raising more than the budgeted R 5,000 crore from sale of its shares in companies held through SUUTI in FY15. Last year's sale of 9% in Axis Bank was through the offer-for-sale route and selling SUUTI stakes in this manner again was also under consideration, the sources said. They, however, indicated that there were some concerns regarding the use of this route and ETF looked a better alternative.

Analysts said the Centre could have easily gone ahead with a plan to exit from the three private firms where it has no business to stay invested in, as none of them is involved in any area of strategic interest to it. A complete exit from the firms could fetch the government close to R54,000 crore at current market prices, much higher than the budgeted PSU disinvestment target of R43,425 crore for this fiscal.

This could have indeed come handy to the government, which has set an ambitious target to reduce the fiscal deficit to 4.1% of the GDP for FY15, even as the projected net tax revenue growth of 16.9% looks difficult to achieve and unpaid subsidy bills from last year are a whopping R1 lakh crore.

The sources mentioned above, however, argued that the government selling its SUUTI stake in ITC could lead to British American Tobacco (BAT) acquiring a majority in the company without paying a premium.

Also, they said, a substantial rise in the PSU index over the past year would make the proposed ETF attractive to investors.

Analysts said the government's concerns over selling its ITC shares were unfounded. Jagannadham Thunuguntla, head of research at SMC Global Securities, said: From a pure investment perspective, if the Centre is looking to take the OFS route, they should first divest the stake in ITC, rather than in Axis Bank or L&T. As the markets rise further and infrastructure investment picks up, banks and construction companies will benefit more than consumer goods companies like ITC.

Madan Sabnavis, chief economist with Care Ratings, said: If you want to create a market for ETF, then you could divest (the SUUTI shares) through an ETF. The option does mean diversification (to investors) as compared to (the option of investing in) shares of a single company.

ETFs, which invest in stocks constituting an index, are traded on exchanges and have increasing traction among investors who are relatively risk averse. Even though equity ETFs still form only a tiny fraction of mutual fund industry's total assets, the growth of this segment is expected to be faster in the coming years and the government obviously wants to give an impetus to it.

The Centre's PSU ETF, launched in FY14, was also a closed-ended ETF as the investment banker. Goldman Sachs raised Rs 3,000 crore from it. Even though some of the efficiently managed domestic ETFs are doing better than the broader benchmark indices, ETFs based on Indian equities continue to be more attractive to foreign investors than to domestic ones. The Indian retail investor is only beginning to appreciate this investment avenue.

SUUTI was created in 2003 after the recast of the erstwhile Unit Trust of India. The assets and liabilities of UTI's schemes, including its flagship US-64 scheme were taken over directly by the government in the form of SUUTI. Apart from the shares in the three private firms, SUUTI also holds prime real estate in metros.

The Cabinet had in March 2012 cleared the proposal to wind up SUUTI and create a National Asset Management Company (NAMC). The plan was to take loan from banks on the strength of SUUTI assets and use these funds to buy government stakes in public sector companies and facilitate the PSU disinvestment process which in the market conditions prevailed then, was stumbling. The cabinet in January 2014 decided to defer its decision to dismantle SUUTI, paving the way for sale of its share in the private companies.

FE had earlier reported that the government's FY15 proceeds from disinvestment including that from "SUUTI stake sale," pegged at R63,425 crore could turn out to be even higher. According to the finance ministry's internal estimate, stake sales being lined up for the year in 11 PSUs, including ONGC, Coal India, SAIL and NHPC, the government could fetch Rs 13,732 crore more than the Rs 43,425 crore budgeted. Additionally, the proceeds from sale of residual stakes in two private companies listed Hindustan Zinc and unlisted Balco, both controlled by the Vedanta Group could well be above the budgeted figure of Rs 15,000 crore.