Why CPSE ETF is not a workable idea

The government’s success with market related products has been poor to say the least. Rajiv Gandhi Equity Savings Scheme was launched with much fanfare by the Finance Minister P Chidambaram to help improve retail participation in the markets. So complex was the scheme that even with a hefty 5-8 per cent incentive structure to the distributors, none of the asset management companies could generate enough funds. The cumulative corpus of these funds is only Rs 258 crore.

The government is now planning to try its hand on exchange traded funds (ETF) by launching a Central Public Sector Enterprises (CPSE) ETF. There are only two issues here. Neither are government owned companies popular with investors nor are the ETFs.

Consider the fact that even as markets have touched new highs, BSE PSU index is nearly 50 per cent away from its all-time high. The reason they are languishing is because of their poor financial performance both on a standalone basis as well as comparative basis with other sectors.

The finance minister however needs to get the credit for coming out with innovative ways to sell stakes in PSUs. It started with normal divestment but failed to find much investors interested in PSU stocks. Ultimately government owned insurer LIC had to buy the shares as a face saver for the government.

Then the finance ministry asked Coal India and NHPC to either buyback government’s stake or shell out a bumper dividend. Coal India preferred to shell out dividends while NHPC agreed to buyback government’s stake. And finally the ministry asked public sector companies to buy government’s shares in each other to raise money.

With fewer alternatives left with it, the government is now planning to rope in the retail investors by launching an ETF which will track an index comprising of ten public sector companies, some of which failed to find an investor in their divestment programme. The CPSE ETF is expected to raise Rs 3000 crore which, politely said, is too optimistic, unless LIC is allowed to invest.

Let’s look at the fact of ETFs in India. Assets under management of ETFs have grown from Rs 1,396 crore in March 2009 to Rs 11,807 crore in September 2013. But most of the money is in Gold based ETFs. Out of the Rs 11,807 crore in ETFs, amount invested in gold ETFs is 9355.44 crore. Another Rs 640 crore is invested in debt based ETFs. Asset management companies currently manage only Rs 612 crore under ETFs. If we remove Goldman Sachs Nifty BeEs which has a corpus of Rs 363.92 crore the other 15 ETF equity linked funds are managing only Rs 248 crore. There are two ETFs managed by PSU banks who between them manage Rs 13.33 crore.

Yet we have a finance ministry which says it expects to collect Rs 3000 crore, five times the existing size of all 16 funds that are managing equity funds.