CPSE Exchange Traded Funds

Investing in shares cannot be everybody’ passion. A person who wants to invest in equity shares would need to know and analyze the market, understand the economy, sectors and the company itself. He would need to go thru the financial documents of the company such as balance sheets, profit and loss accounts etc. Thus, not everybody can make best investment decisions owing to the nature of the stocks market, which are example of perfect competition.

A person, who is used to swimming in a pool cannot willingly jump in a ocean, because it is far more difficult and full of risks. It would need higher skills and capability to face the perils of the ocean, including but not limited to the dangers of surging currents, sharks, whirlpools etc. The swimming pools represent a controlled environment. The ocean is uncontrolled.

The above example is an analogy to stocks and funds. Most people are small Individual investors and they don’t have the capability, skills or willingness to invest directly in stocks. They need something like a controlled environment of a swimming pool.

Collective Investment Schemes (CIS)

The Investment schemes in which money from investors is pooled and then invested are known as Collective Investment Schemes. The idea behind pooling money is to reduce investment amount per head, reduce risks and derive benefits of working as part of a group

In a collective investment scheme or a fund the shares or units represent ownership in a pool of investments (shares, bonds or a combination of both) that is managed by a professional fund management company, which are called Fund Managers. The Funds are generally not traded on a stock exchange but investors buy and sell units in funds to the manager at any time. Funds are normally structured as open-ended. By Open ended, we mean that whenever the fund manager receives new monies, additional units are created. Similarly, when the investors withdraw the money from the fund, the units are cancelled in exchange of their cash value. Some funds are Closed ended also. By close ended, we mean that these funds have a finite amount of capital in issue and new units cannot be created or cancelled on a day-to-day basis.

Exchange Traded Funds

The Exchange Traded Funds (ETF) are also like Mutual funds and are a kind of collective investment schemes. But the ETFs are different from Mutual Funds in the sense that while we need to buy the mutual funds from the Fund Managers only, ETF can be purchased from another investor. Thus, ETF have a major feature, that they can be traded among investors, very much similar to the stocks. The adjacent graphics and following table makes it clear.

Mutual FundETF
MFs are not traded on stock exchanges and we have to buy them directly from the fund house.ETFs are traded on stock exchanges and you can buy and sell them on the exchange.
We don’t need a share trading account to buy a mutual fund.Since ETFs trade on the market, we need a trading account to transact in them.

In this way, an Exchange Traded Fund (ETF) is primarily a mutual fund scheme which is listed and traded on a stock exchange. An ETF can invest in the following:

Equities – replicating the composition and performance of an equity index (e.g. CNX Nifty, CNX Junior Nifty)

Commodities – tracking the actual price of a commodity (e.g. Gold ETF)

Money market instruments – which include short-term government securities and call money.

The ETFs have become very popular these days.

The adjacent graphics sourced from Goldman Sachs website shows the growth of ETF in India in recent times. The reason of their popularity is that The ETF has more liquidity, more transparent, involve lesser costs, involve lesser investments per units and they provide best of both worlds viz. Fund Market as well as Stock Market.

Exchange Traded Funds: A New Route to Disinvestments

The hitherto popular disinvestment routes included either FPO (Follow on public offer), which was a more time consuming process and at higher cost, or later through OFS (Offer for sale). Government sorted to strategic sale, minority sale etc. and it was observed that there was an immediate pressure on price the moment a disinvestment was announced. These routes were not for swimming pool swimmers. This also meant disinvestments only in individual companies, and hence it was difficult to prioritise and reach a larger target.

Consequently, we have seen that government has not been able to achieve targeted success in that. We note here that in the last budget, Finance Minister P Chidambaram had estimated to mobilise Rs. 40,000 crore by selling minority stakes in state-owned companies. As per the interim Budget 2014-15 presented in Parliament, the receipts from disinvestment for 2013-14 have been revised downward to Rs. 16,027 crore from Rs 40,000 crore. What were the reasons of this flop show? Some of the reasons are as follows:

  • Unfavourable market conditions / Investor (read big investors) mood
  • Offers made by government not attractive enough
  • Stringent bureaucratic procedures
  • No investor friendly policies
  • Retail investors almost absent from disinvestment programme

In February 2012, the Goldman Sachs Asset Management (GSAM) started having conversations with the government and Department of Disinvestment. They made a presentation to the government and pointed out what exactly the department was missing by ignoring retail investors. The company showed how participation by a large number of investors could be encouraged as well as how to leverage the prevalent nationwide stock exchange network. GSAM is an expert organization in Exchange Traded Funds (ETFs). They proposed that an ETF could be an elegant route for disinvestment and can be an instant hit. It can provide a low-cost, transparent, rules-based, diversified vehicle that could be used by a wide variety of investors. This is how CPSE ETF concept was born.

Finally, the CPSE ETF was issued recently and Government is startled with the good investor response to the current CPSE-Exchange Traded Fund. Centre is expected to reach its revised disinvestment target of Rs 16,000 crore for the current fiscal after the new fund offer closes in this month.

Advantages of New Route

The CPSE ETF provides ability to participate in the long-term development of India, by purchasing stocks in Infrastructure and Natural Resources arena. It provides small retail and HNI investors with the ability to diversify exposure across a number of Public Sector companies through a single instrument. They can be traded on stock exchange terminals across the country. They enable large investment in blue chip Public Sector enterprises without the constraint of market liquidity on the underlying individual stocks.

Type of Scheme

CPSE ETF is an Open Ended Index Scheme, listed on the Exchanges in the form of an Exchange Traded Fund (ETF) tracking CPSE Index. This scheme is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme, 2013 (RGESS).

CPSE Index

A CPSE Index has been constructed in order to facilitate Government initiative to dis-invest some of its stake in selected CPSEs through the ETF route. It is made of 10 Blue-chip CPSEs with varying weightage shown in adjacent table. All these companies are listed at National Stock Exchange of India Ltd. (NSE); having more than 55% government holding and have a market capitalization of more than Rs. 1000 crore.

The above table makes it clear that maximum weightage in the CPSE Index is given to the energy sector i.e. ONGC and GAIL. The sector wise breakup is shown in adjacent pie diagram.

Model Questions

  1. Differentiate between a stock, mutual fund and Exchange Traded Fund. Which one is better for small investors and why?
  2. Exchange Traded Funds provide best of both worlds viz. Fund Market as well as Stock Market. Amplify.
  3. The ETF route to disinvestment seems to be much more efficient and novel way than traditional routes. Discuss.
  4. What is the CPSE Index? Discuss various sectors included in this index.
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