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The new CPSE fund is a good way for the government to sell stock, but investors should consider all aspects before committing.
Almost two years after it was first mooted, the specialised exchange-traded fund (ETF) for public sector stocks is finally getting off the ground. The government has selected Goldman Sachs Mutual Fund to run this fund, which will be called the Central Public Sector Enterprises (CPSE) ETF. ETFs are generally based on an equity index and replicate that index in their portfolio so that investors can invest in it easily.
The CPSE fund’s underlying index is a new index of the same name that the National Stock Exchange launched last week. The index has 10 stocks as its components — Coal India, GAIL, ONGC, Indian Oil, Bharat Electronics, Oil India, PFC, REC, Container Corp and Engineers India. While ETFs are mutual funds, they are bought and sold on stock exchanges like mutual funds. An investor who wants to invest in this basket of public sector stocks can buy this ETF instead.
For the government, the CPSE ETF essentially offers an on-demand, instant divestment route that is always open. This is the solution to a different problem that was talked about when such a fund was first mooted a couple of years back. At the time, the idea was that a PSU ETF could be used to bundle less-desirable PSU stocks with more saleable ones, sort of like what your provisions store does to get rid of hard-to-sell items. That idea was clearly unworkable.
By contrast, the new ETF consists entirely of what may be called investible PSUs. From the government’s point of view, the ETF sets it free from not being able to tap the equity markets with agility, when it’s the best time to do so. Currently, it has to go through the rigmarole of a fresh offer-for sale whenever it has to disinvest. Given the glacial pace at which things move, it has hardly ever managed to do so at the best possible moment. The ETF will be an effective antidote to this problem. The demand for the ETF (and thus the price realised) will be highest when it’s the best time to disinvest. At such times, the government should be able to disinvest smoothly in a graduated, on-demand manner.
That’s the story from the government’s point of view, whose overriding interest in the matter is to sell enough stock to help with its fiscal deficit.
What about investors?
There are pluses and minuses.
On the plus side, these companies are among the better options among PSUs. At this point of time, they are cheap and thus very good value. On top of that, the government’s fiscal conditions mean that these companies will continue to pay good dividends. Moreover, the government has sweetened the deal in an innovative way. For one, during the NFO, there’s a 5% discount from a ‘reference price’ of these stocks. On top of that, there’s a loyalty bonus, whereby investors who stay invested for one year from the NFO will get a bonus one unit for every unit held.
On the negative side, it’s generally never a good idea for fund investors to buy a sectoral or a thematic fund. The whole point of investing through an equity fund — even an ETF or an index fund — is that you should not have to decide whether and how much exposure you should have to a certain type of stock and how long you should maintain that exposure. That’s why it makes sense for fund investors to invest only in diversified funds. Even if you accept the logic of a thematic fund, it has to be an investing theme, like banks or IT or consumer goods or auto or something else that you think will do better than the rest of the market. The CPSE ETF is none of these. Instead, it’s a strange creature — a thematic fund where the theme happens to be the promoter, unlike a sector fund, where there is a unified investment case for a particular set of stocks.
So those are the factors you have to balance out. Tactically, at this point of time, this is an attractive package. Strategically, in the long term, these are companies with a terrible promoter, which has never cared for minority shareholders.
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