Sebi rule may lead to change in ETF structure

PowerGrid likely to be dropped from the proposed government ETF

The composition of the proposed Central Public Sector Enterprises exchange-traded fund (ETF), comprising units of top state-owned companies, will have to be different from what was envisaged.

Power Grid Corporation, which had a public offering recently, might have to be dropped from the proposed ETF. For, Securities and Exchange Board of India rules do not allow promoters to sell shares more than once within a specified period.

The CPSE ETF might then have 10 stocks instead of the 11 cleared by an expert government panel in January. The government, racing against time to meet its year’s disinvestment target before March 31, is looking at raising nearly Rs 3,000 crore from the ETF, whose new fund offer (NFO) is likely to hit the market in the first week of March.

The government had sold a little over 11 per cent in Power Grid through a follow-on public offering (FPO) in December. Sebi norms on equity issuances says a promoter entity can't conduct another round of stake sale for a year after an FPO.

According to sources in the know, the department of disinvestment had written to Sebi for an exemption from this rule, to create the ETF as planned earlier. However, the capital market regulator was not willing. “It is unlikely that the regulator would relax the norm. We might have to drop Power Grid from the ETF,” said a person with the direct knowledge of the development.

The Centre was planning to dilute another two to three per cent of its holding in Power Grid, which were to be among the top four components of the ETF in weightage. “The relaxation of the norm would have been imperative had the government been able to go ahead with its plan to sell in companies like Coal India, Indian Oil and Oil and Natural Gas Corporation. However, given the poor market conditions, it is unlikely stake sales in these companies would take place this financial year,” said another source.

The government appointed Goldman Sachs as the fund manager to the ETF and ICICI Securities as advisor. The money garnered through the NFO will be used to purchase government stake in various companies. The draft offer document for the NFO is likely to be filed with Sebi in the next two weeks. Sources said the CPSE ETF will also have certain features such as ‘loyalty incentive’ and ‘upfront discount’, which the securities market regulator has agreed to, as investor-friendly.

The loyalty incentive feature will reward long-term investors with bonus units, while upfront discount will be given to retail investors who subscribe.

CLEARING REGULATORY HURDLES

• Composition of ETF may need to be tweaked
• Sebi unlikely to relax norm on cooling-off period
• Regulator okay with investor-friendly features of ETF
• ETF to offer ‘loyalty incentive’ and ‘upfront discount’

THE CPSE ETF BASKET FINALISED BY EGOM IN JANUARY

• ONGC
• Coal India
• Indian Oil
• Power Grid Corporation
• GAIL
• Oil India
• PFC
• REC
• Concor
• Bharat Electronics
• Engineers India