Funds quit race to launch public sector ETF

Of the 6 mutual funds which had evinced interest, only 2 made presentations before the inter-ministerial group on Monday

Various mutual funds have opted out of the race to bid for a mandate to launch exchange-traded funds (ETFs) consisting of state-owned companies, due to the steep marketing cost requirements.

Of the six MFs which had evinced interest in offering this product, only two made presentations before the Inter-Ministerial Group at the department of disinvestment (DoD) today, for the mandate to create and launch the so-called Central Public Sector Enterprise (CPSE) ETF, according to sources.

Goldman Sachs Asset Management and UTI MF were the two fund houses that made presentations, said a person in the know.

A UTI official confirmed this. Goldman Sachs did not respond to phone calls or a text query. The other four which had planned to join the race were DSP BlackRock, Kotak MF, Reliance MF and SBI MF.

The proposed CPSE ETF would be a basket of shares comprising listed public sector undertaking (PSU) stocks.

“The proposed CPSE ETF will serve as an additional mechanism for the government to monetise its shareholdings in those CPSEs that eventually form part of the ETF basket,” said the Request for Proposal (RFP) floated by the DoD for creation of the ETF.

Fund houses have been reluctant because they would have to pay upfront a marketing expense fee of Rs 15 crore, which officials say is too high.

Fund house officials said it did not make business sense to incur expenditure of that magnitude for a New Fund Offer (NFO) period of just 15-20 days. An NFO for an equity-oriented scheme is about Rs 7-8 crore, while for an ETF it is Rs 2-3 crore, they said.

“It is up to a fund house to decide how much they would want to spend on an NFO. But it would hurt an AMC’s business to spend that much on the product,” said Deepak Chatterjee, managing director, SBI MF.

MF sector sources said asset management companies had made an appeal to DoD to reduce the marketing expenses but the latter had said this would ensure only serious players came forward.

“A presentation to that effect was made during the pre-bid meetings with the fund houses but it was just an idea that was being floated around. We decided not to make any changes to the marketing expenses,” said a department official, who did not wish to be named.

According to the RFP, the asset management company chosen would have to incur marketing expenses of Rs 15 crore for the promotion of the NFO. This would be in addition to the other expenses by the AMC with relation to the creation of the index for the ETF and the payment to the distributors, among others.