Structure, composition of CPSE basket to be finalised soon

With the cabinet approval in place, the Centre is now moving swiftly to formulate the CPSE exchange traded fund (ETF). The department of disinvestment, in consultation with Goldman Sachs Asset Management (India), which is managing the ETF, will soon appoint an index provider to finalise the structure and composition of the CPSE basket.

The finance ministry is also working on giving incentives such as royalty bonus and upfront discount to woo retail investors for the fund.

ETFs, like stocks, are listed and traded on the stock exchanges. India?s ETF industry is small, with gold-based ones being the most common. Earlier this month, the Cabinet gave its approval to form the first-of-its-kind ETF fund for PSUs. Sources said the government plans to raise at least R5,000 crore through ETFs as a part of its R40,000-crore divestment plan in the current fiscal. The department plans to launch the fund in 3-4 months.

According to the plan, an index based on the shares of PSUs will first be created. The index provider is likely to be a stock exchange subsidiary such as IISL (India Index Services & Products Limited), a joint venture between National Stock Exchange of India Limited and CRISIL, or S&P BSE. The index will get a final approval by an empowered group of ministers headed by finance minister P Chidambaram. Once the index is finalised, the AMC will submit the offer documents to Sebi, which will approve the listing of new fund offer (NFO).

A senior official said, ?The department along with Goldman Sachs will finalise composition of the index based on the criteria such as market capitalisation over R3,000 crore, good free float and price performance of stock of last 3 to 5 years?.

The government is also working on a host of incentives to attract retail investors. This could include royalty bonus to investors holding units of the fund for over a year or more. The disinvestment department is also planning to give upfront discount or discount to the base price to attract investors.

In the Budget for the current year, the finance ministry reduced the Securities Transaction Tax (STT) for mutual funds (MFs) and ETFs from 0.25% to 0.001%. In addition, for the sale or purchase of MF units or ETFs on the stock exchange, the levy was reduced from 0.1% to 0.001% and will be borne only by the seller.

ETFs are expected to deepen the equity market and will be beneficial to government from a pricing perspective. The fund will ensure that the stocks of such firms are not manipulated or beaten down during the run-up to the divestment in PSUs. In the past, there have been instances of PSU stocks falling before the public float, making it difficult for the government to raise the targeted amount.

At present, there are 33 ETFs having assets under management of close to R11,500 crore and held by 6.2 lakh investors. Gold ETFs dominate ETF market in India. The concept of CPSE ETF is inspired from Hong Kong’s Tracker Fund.