It's raining PSU funds

Govt's divestment plans encourage funds to bet big on state-owned firms.

The government’s plan to divest its stake in public sector undertakings (PSUs) is encouraging fund houses to launch PSU funds. Some mutual funds have already launched and some others are in the process of launching PSU-dedicated schemes.

For instance, Shinsei Mutual Fund has recently launched a PSU Bond Fund, which will invest in a portfolio of debt and money-market securities issued by PSUs and nationalised banks.

Similarly, Religare Mutual Fund has filed its offer document with the Securities and Exchange Board of India (Sebi) to launch Religare PSU Equity Fund, an open-ended scheme. SBI Mutual Fund is planning to launch a similar fund by the end of this financial year.

“Our plan to launch a PSU fund was based on the proposed disinvestment plan as well as investments in the core sector, as most of the bank, energy and infrastructure stocks were of PSUs. While in the last five years, PSU stocks have underperformed, over a 10-year period, they have outperformed the index,” said Saurabh Nanavati, CEO, Religare Mutual Fund.

Religare’s PSU Equity Fund will have the Bombay Stock Exchange (BSE) PSU index as its benchmark. It will invest in companies in which the Central or state governments have a majority stake, or the management control. The scheme, which is expected to be launched by September, will invest a minimum of 65 per cent of assets in the stocks of PSU Index, and a maximum of 35 per cent in PSU companies outside the index. The maximum exposure to non-PSU companies will be 20 per cent, while 35 per cent will be in debt and money-market instruments.

SBI Mutual Fund is also drawing up plans for a PSU-focused fund, and hopes to launch it this financial year. “We are working on a PSU fund, and hope to launch it this financial year after we have internal and Sebi approvals,” said an SBI Mutual Fund official.

UTI Mutual Fund was the first fund house to launch a scheme in the PSU space –UTI Mastergrowth Unit Scheme – in January 1993. It was renamed as UTI Top 100 Fund.

The government is expected to kick-start its disinvestment programme with the initial public offer (IPO) of National Hydroelectric Power Corporation (NHPC) in August, followed by Oil India and other PSUs.

In June, a Morgan Stanley report said if the government reduced its stake across all PSUs, both listed and unlisted, to 51 per cent, it could potentially raise $163 billion. “We expect divestments of around $4-5 billion in FY10, which would give the government some flexibility on the fiscal front,” the Morgan Stanley report pointed out.

According to the latest Economic Survey, the government should sell a minimum 10 per cent stake each in all unlisted public sector enterprises. The Survey recommended a disinvestment target of Rs 25,000 crore annually.