CPSE ETF – Whether To Invest Or Not?

It seems that the UPA Government is trying its level best to mop up money through the PSU Divestment. After utilizing all the means to capitalize on the PSU the Government is now going ahead with the CPSE Exchange Traded Funds (ETF). Here the Government has set an ambitious target to raise Rs 3000 Crore through the scheme. Here the government will transfer the shares (Similar to divestment) of selected listed entities.  An index is already being created by IISL on the basis of free float market Capitalisation basis. Now let’s understand the CPSE ETF in detail and the find an answer to whether to apply for the scheme or not.

It is an opportunity to invest in selected ten PSUs through an ETF. The Index is created by IISL and consists of 10 companies with specific weightage. The companies are as follows ONGC (26.73 % weightage), GAIL 18.48%, Coal India (17.75 %), REC (7.16%), Oil India (7.04%), IOC (6.82%), PFC (6.49%), Container Corporation (6.40%), Bharat Electronics (2%) and Engineers India (1.13%). Now here we feel some big names like NTPC and even few oil marketing companies are missing. Apart from that the concentration to energy segment is as high as 59%. So it seems to be more of energy sectors ETF rather than a CPSE ETF.

In addition there are few questions about the way IISL created the index. Like there are few criteria to enter the index. But when asked about if the company does not qualify to the criteria after few months of trading, will there be changes in the companies, the ISSL answered that, the Index remains the same. So here we have certain questions about the flexibility of index. Further the process of the change in the index would be difficult as it would involve the Government which would transfer the shares to the ETF.

Now as regards the offer, the New Fund Offer (NFO) will open on 18th March 2014 for anchor investors and on 19th March 2014 for non-anchor investors. The ETF is managed by the Goldman Sachs Asset Management. It is an open ended scheme and will be listed on the NSE in the form of an ETF.

There are few advantages for the retail investors (Less than Rs 2 Lakh investment). There is a discount of 5% on the “Reference Market Price” of the underlying shares of CPSE Index, which will be offered to the CPSE ETF by the Government of India (“GOI”). The Reference market price would be calculated on the basis of volume weighted average price for the days the offer is open.  Apart  from that there is an advantage of  about 6.66% Loyalty Units (One Loyalty Unit will be allocated for every 15 Units held) for eligible Retail Individual Investors  holding the units continuously from the allotment date to the Loyalty Unit Record Date, which will be one year from the NFO allotment date. As for the non-anchor investors NFO closes on 21st March 2014. Scheme reopens for continuous subscription and redemption on or before 11th April 2014.

As for the scheme the AMC has stated many benefits like play on India growth story, ownership of large companies, diversification and last but not the least the flexibility of lower expense ratio. Being an ETF there is no entry and exit load. There are few tax benefits as it is covered under the Rajiv Gandhi Equity Saving Scheme. The past data showed that the performance or the ETF has been good as compared to the Index as dividend yield was better than the broader market index. . As per data published by the index service provider, as of 13th March 2014, the CPSE index had a PE ratio of 10.52 and dividend yield of 3.51%. Retail Individual Investors can invest a minimum of Rs. 5,000 and in multiples of Re. 1 thereafter up to Rs. 200,000. Non Institutional Investors/ QIBs can invest a minimum of Rs. 200,001 and in multiples of Re. 1 thereafter. Maximum Amount to be raised during the NFO will be Rs. 3,000 crore subject to maximum of 3% of the paid up share capital of each of the constituents of the CPSE Index.  

Now the moot question is, whether to invest in the ETF or not. We are of the opinion that, it will only provide market returns. And the investment in the markets is usually made to get better than market returns. So it does not provide any higher returns. Again those who want regular returns have many other options like Bank FDs.

Hence the scheme does not excite us to be recommended a buy. However, the lower risk taking investors can take some exposure to the scheme.