The government may set up multiple exchange traded funds to sell its shares in state-run as well as private companies to give a leg-up to the ambitious Rs 69,500 crore  disinvestment plan in FY16, sources said.

Besides bringing the second tranche of the existing CPSE ETF to raise Rs 5,000 crore, the government may create a second ETF consisting of only PSU shares, while a third will likely be created by pooling in shares owned by the government in private companies such as Hindustan Zinc, Balco, Tata Communications, IDFC and shares held through SUUTI, sources told FE.

Using an extant CPSE ETF, which invested in a pool of 10 public sector stocks, the government raised Rs 3,000 crore in FY14. The units of this ETF, managed by Goldman Sachs, saw capital appreciation of 40% in the first year after debuting on March 28, 2014, giving a positive narrative to officials to push for more ETFs.
ETF is seen as a safer bet to invest in equities compared to individual stocks which are vulnerable to fluctuations in the market.

The department of disinvestment, which is pushing the government’s agenda of increasing retail participation in its disinvestment programme, has got a shot in the arm after the Employees’ Provident Fund Organisation, which manages retirement funds worth more than Rs 5 lakh crore, decided to invest up to Rs 5,000 crore in equity, mainly CPSE ETFs, this year. The department was also confident that PFRDA would shortly allow retirement funds under NPS to invest in ETFs. “Time is on our side…We can create more ETFs this year,”a senior official said, referring to the early start of the disinvestment programme with 5% stake sale in REC this month.

Analysts also feel the government should look at raising more funds via the ETF route along with other options such as an offer for sale as the disinvestment target was very stiff this year. “Retail and HNIs will be very much interested in ETFs,” said Arvind Mahajan, Partner in KPMG India.

Despite failing to meet the disinvestment target in the last five years due to several factors, including unfavourable market conditions, the government has set a stiff target for this fiscal as it needs funds to reduce the fiscal deficit further and spend more on infrastructure development.

Out of 69,500 crore, Rs 41,000 crore would be raised from stake sales in PSUs including ONGC, Indian Oil, BHEL and Power Finance Corporation. Another
Rs 28,500 crore will be raised by selling government stake in private companies; and privatisation of some loss-making and profit-making PSUs.

However, officials have recently expressed doubt about meeting the disinvestment target as share sales in ONGC and IOC, which could have fetched half of the Rs 41,000 crore to be raised from PSUs, are off the table at the moment.

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