Budget 2017 announced that the government will continue to divest its stake in state-owned companies in FY18, and investors could look forward to more CPSE ETFs. The markets cheered this announcement.
The reason behind this cheer was the hugely-successful, R6,000 crore CPSE ETF Further Fund Offering (FFO) that closed on January 20, 2017. The CPSE ETF has done well so far. In the three years since it was launched in 2014, the ETF has shown returns that exceed the Nifty-50 returns.
Globally, ETFs are used by retail investors as well as institutional investors. For the retail investor, ETFs provides a great opportunity to invest in a basket with a lower ticket size.
When the government launched the CPSE ETF in 2014, prior successes in ETFs had been largely on equity indices and gold. The government launched the first CPSE ETF with the objective of providing investors, particularly small retail investors, an opportunity to invest in a combination of blue chip public sector companies across sectors, thereby providing diversification and minimising concentration risk. An important aspect of the ETF was a careful selection of CPSE stocks based on their long-term performance, liquidity and dividend track record. Based on these factors, a final basket of 10 stocks was chosen—Oil & Natural Gas Corporation, GAIL (India), Coal India, Rural Electrification Corporation, Oil India, Indian Oil, Power Finance, Container Corporation of India, Bharat Electronics and Engineers India.
The 2014 CPSE ETF had many firsts, not only for the Indian market but also from the global perspective. It was the first time that government disinvestment of public sector stocks was done through the ETF route. It was also the first time that the concepts of upfront discount, loyalty unit additions and anchor investors were tested in a fund format.
The first issue of CPSE ETF was a resounding success. ICICI Securities, continuing in its role as advisor to the department of divestment (Dipam), also worked on the design of the FFO launched in 2017. The structuring of the FFO was based on the twin philosophy of making it a win-win for both the government and the investors. A new allocation mechanism was structured keeping in mind the need to attract the retail investor. For the first time, a fund offering had a priority for full allocation of all retail investors. This ensured that small investors could get meaningful allotment and avail of the opportunity to get quality stocks at a discount. The CPSE ETF also enabled the government to raise a significant amount even though it was offering only a small proportion of stock for each of the companies in the basket. This was an important factor as it calibrated the quantum of shares being sold and hence ensured that the government got an optimum price for its stock as well.
The FFO in January 2017 received a strong response—the issue was oversubscribed 2.3 times. This was the largest disinvestment programme undertaken by the government of India using ETF and the largest fund offering by any ETF/mutual fund in India till date. The number of retail applications received was 2.7 lakh (approximately seven times the retail applications received during first tranche held in March 2014). The total value of retail demand was R2,465 crore and the average retail ticket size was R91,000.
In summary, the CPSE ETF is now a tried and tested means for the government to divest significant amounts at an optimal price as each CPSE included in the ETF only sees a small dilution and hence does not result in significant price correction. More importantly, it has also proved to be a good means of generating retail interest by offering the opportunity to buy a basket of quality PSUs at a discount and on a priority basis. Lastly, it emphasises that well-structured innovation, based on clear objectives of maximising government inflows and generating retail interest, can be a win-win proposition.
The author is MD & CEO, ICICI Securities Ltd