The Low-Down on the PSU- ETF Where The Govt “Quasi” Divests Its Holdings

8 comments Written on March 18th, 2014 by
Categories: IPO

The PSU-ETF is here. You’re wondering:

WTF is a PSU-ETF? Don’t we have enough Three Letter Acronyms already?

The answer to the second question is that we can never have enough TLAs.

The answer to the first is, for today’s short-attention span people:

  • The government owns stakes in public sector companies
  • It needs to sell part holdings to raise money.
  • It’s tried selling some of these shares to investors, but they don’t want to buy.
  • The government had to force Life Insurance Corporation, the state owned behemoth insurer, to buy and “rescue” such issues.
  • Sick of this, the government is now using the mutual fund route.
  • You buy the Exchange Traded Fund (ETF) that Goldman Sachs is issuing, and that money will go to the government and you’ll get units, which you can sell on the stock market whenever you want.

Whoa. Explain.

I hate complicated stuff. I mean I love complicated stuff, what with my having some kind of math background and loving numbers and the associated textual snootiness that comes from saying phrases like yield curves and statistical arbitrage and intensive fiscal stimumus withdrawals. But when its real money on the table, you gotta be able to tell the story easy.

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The easy part of the story is that the government gets to sell shares. Slightly less easy is who is buying them.

First, read: What are Exchange Traded Funds?

Now, you know that an ETF is just a mutual fund, whose units are listed on an exchange. There is a new ETF, that is called the Goldman Sachs CPSE-ETF, which will invest only in a few stocks contained in a CPSE Index. These stocks are all Public Sector Enterprises, and the government owns a big stake.

What Stocks?

image

(If you can’t read the image,  the stocks are ONGC, GAIL, Coal India, Oil India, REC, PFC, IOC, Container Corp, Bharat Electronics, and Engineers India).

The CPSE Index will contain these stocks and the ETF will have investments in the exact above proportion. Each ETF unit will be 1/100th of the CSPE Index; meaning, if the CPSE Index is at 1000, then each ETF unit will be approximately Rs. 10.

(Give or take; dividends will increase the ETF unit’s value higher than the index, and the ETF charges a management fee which will reduce each unit’s value. So there will be a “tracking error”, but I expect it to be in your favour in the longer term)

NFO Discounts and Process

Currently there is no such ETF in the market. It’s new. So you can buy through a “fund offer” which involves doing a paper purchase, going through an intermediary like FundsIndia, or buying directly from Goldman at gsamonline.in

Why buy at the NFO? Because the money collected will go to buy stocks from the government in the above proportion, but at a 5% discount to the market price. This market price is the average full day volume weighted average price of each share on the NFO days (March 19 to March 21, 2014).

The ETF will list in April. I don’t really know when so I’m taking an arbitrary date of April 11 to explain.

  • You put your money down.
  • When the NFO’s over, the ETF will calculate how many shares they need, and the government will sell them those many shares..
  • Shares are sold by the government to the ETF after March 21, based on the 5% discount of each share as above.
  • ETF Units are then alloted to ETF applicants, where the total number of units is based on making each unit 1/100th of the CPSE index.
  • If CPSE Index is 1,500, each unit should be Rs. 15.  So number of units = total market value of all shares divided by 15.
  • Units will be listed after April 11
  • So the 5% discount may not be a discount if those shares have fallen 5% between March 21 and April 11.

You can sell after April 11.

Loyalty units

If you are a retail investor (individual putting in less than 2 lakh), and you buy at the NFO (not from the market ), and hold for one year then you get Loyalty Units. One free unit for every 15 units you hold. If you sell in the middle, then it’s based on the lowest holding in the year.

Important stuff

  • Expense ratio of just 0.49% - this is very cheap.
  • PSU profit making stocks
  • 5% discount to the market price
  • 1 loyalty unit for every 15 you buy
  • Maximum of Rs. 3,000 cr. in the NFO, that’s how much the government wants to sell.
  • US residents can’t buy this fund.

Will I buy?

I like the stocks. I like the concept of getting about 12% discount overall. This could be a good idea for the kids education fund which I don’t need to touch for a long time. They’re very big on power and energy, which I think will drive a lot of our future.

However, the market could crash considerably, since and it may be more useful to just buy the same stocks over time. I would for instance totally avoid ONGC. Last year, the government sold ONGC shares in a public offer in March and then put a large part of the under-recovery costs on ONGC later. (More than 49,000 cr. was paid by ONGC to the downstream marketing companies of IOC, BPCL and HPCL which lost money selling fuel at pumps at lower than cost prices)

And this is the same with GAIL, and PFC and REC. The problems in this sector can get worse before they get better. Even if a certain political person becomes PM, I don’t see that changing in the near term. But it might just make sense to quit overanalyzing and allocate a small amount of money to the fund anyhow.

I think this is an interesting move by the government and could form the base of further disinvestment (just add stocks to the index!) The discounts are attractive for retail investors. However, liquidity might be a concern if you need to sell and there aren’t enough buyers at that time in the market. And once the government has sold its shares, it might force losses into the hands of these very companies. Take your call.

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

8 comments “The Low-Down on the PSU- ETF Where The Govt “Quasi” Divests Its Holdings”

Will the concept of direct/through broker would apply to this NFO? would it be more beneficial to invest directly?

I suppose the only difference is that the broker can get the Rs. 100 transaction charge. There is no other load on this fund, so it’ll likely not make much of a difference either going direct or through a broker.

Deepak,

You have mentioned ” ETF Units are then alloted to ETF applicants, where the total number of units is based on making each unit 1/10th of the CPSE index.”

While I found on CPSEETF Presentation by Goldman Sachs that pricing would be 1/100th of CPSE Index.

Kindly check.

You’re right :) My bad. I don’t know why I wrote that! Thanks for hte heads up.

Deepak,

Thanks for the write-up in easy words.

Will I need a demat account to buy and then sell these before one year?

You’re welcome :)

Demat yes – you do need one, they don’t allow you to own these stocks without one (AFAIK).

Nice writeup…
Congress party has a record of, if i may say cheating small investors repeatedly right since the IDBI ipo in the 90s !
A gent that recently expired told me some time before his death never invest in Govt cos … and he has seen 3 generations rule this country.
Have Chidambaram and gang reigned on the largest market cap destruction of the psu bunch? Most likely yes !

Question i ask is will the future govts will be more responsible and hands off and let the PSUs work as any other businesses while earning thru taxes and dividends rather than cheat small investors and using psus as a milking cow ?

Im sitting on most ipo purchases in the basket , do i sell them and invest in this etf ? Will this basket see a fall (ur hinting that) as market making stops ?
What say u ?

Good questions :) I don’t know whether this is a better deal than individual companies but it’s heavily weighted towards ONGC and I don’t like ONGC for the fuel loss sharing part I mentioned….