ICICI Pru front runner in CPSE ETF bid

At a cost of less than a paisa, the country's number one AMC shakes up competitors

ICICI Prudential Mutual Fund seems to have stunned the mutual fund industry with its bid of 0.0095 per cent for CPSE's new Rs 5,000 crore exchange-traded fund (ETF).

With this bid, which means a charge of Rs 47.5 lakh, the fund house has beaten the next two competitors hands down in cost – Reliance Mutual Fund (0.065 per cent) and SBI Mutual Fund (0.063 per cent) or around Rs three crore. Sources close to the development confirmed that

ICICI Prudential seemed to be the front-runner to bag the mandate.

However, two factors about the bid have surprised the industry. One, the government said that the fund house winning the mandate would have to spend at least Rs 15 crore to promote the ETF. Two, there are various minimum costs that fund houses have to incur even in an ETF. For example: there is a mandatory investor education cost of 0.02 per cent, another 0.03 per cent has to be incurred on structuring the ETF and there are management costs as well. “Such predatory pricing can hurt the industry badly because if fund houses have to lose money to gain assets, they will charge other existing schemes to make up for losses in this ETF,” said the head of a fund house.    

When contacted, a spokesperson of ICICI Prudential Mutual Fund said that they did not wish to comment on the bidding process.  

An ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. The government introduced the concept of CPSE ETF in 2014. The winning bid, last time had come from Goldman Sachs, at 0.49 per cent. Goldman Sachs was bought by Reliance Mutual Fund in October 2015.

According to industry sources, the government uses two parameters – technical and financial – to decide who will get the mandate. The technical parameter has 70 per cent weight whereas the financial weight is 30 per cent. But in circumstances like this, the financial bid is so low from the next competitor that the technical parameter loses its relevance completely.

Industry sources said that ICICI Prudential’s total score was 89.65 as it got a score of 30 on the financial parameter. SBI Mutual Fund, which scored 74, lost out because of a low score of 4.5 on the financial parameter. SBI Mutual Fund had the highest score of 88 in technical parameter. Such situations render the technical parameter, despite a much-large weight, completely useless,” said another CEO of an asset management company (AMC) which was one of the bidders.

A total of seven fund houses had bid for the CPSE ETF – ICICI Prudential, SBI Mutual Fund, Reliance Mutual Fund, Kotak Mutual Fund, UTI Asset Management, Birla SunLife Mutual Fund and HDFC Mutual Fund. Out of the seven, three fund houses bid between 0.06 per cent and 0.09 per cent while three others bid between 0.10 per cent and 0.44 per cent.    

ICICI Prudential was the top fund house in June 2016 with assets of Rs 1.93 lakh crore. It was closely followed by HDFC Mutual Fund at Rs 1.92 lakh crore and Reliance Mutual Fund at Rs 1.67 lakh crore.