A good deal, is it?

Sanjiv Shah is probably going to be the next go-to man for the government. He just did something unthinkable, creating a novel way for the government to offload its lacklustre shares. Sure, once upon a time public sector companies were a fancied lot, but not anymore. But the Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) launched by Goldman Sachs last week ended up collecting ₹ 850 crore — no mean amount for an ETF. That is some reward for two years of sustained effort by Shah in carefully crafting the product and getting it to market. Shah pioneered ETFs in India through his fund, Benchmark, which was bought over by Goldman Sachs in 2011.

Predictably, CPSE ETF’s substantial collection came purely because of near-term incentives that the government made possible. The fund offered investors an instant discount as the government agreed to sell its shares to the fund at a 5% discount to market price. For investors in the initial offering, there is also the promise of a loyalty bonus of one share for every 15 shares held. This is in addition to the tax savings under RGESS. “The fund has been a hit with strong collections both from institutional and retail investors, with nearly 40% coming from the former,” says Dhirendra Kumar, CEO, Value Research, a Delhi-based mutual fund tracking agency. 

It’s also a matter of good timing. Currently, there is great expectation that Narendra Modi will come to power and, if that happens, the pace of divestment will accelerate. Even otherwise, the poor fiscal deficit leaves the government with no option but to divest its stakes to partly plug the yawning gap. Although additional share supply into the market should actually temper prices, historically, that’s not the way stocks have behaved in India. Perversely, divestments have always spurred upside in stocks, albeit only temporarily. 

The energy dose

The CPSE is loaded with energy stocks

Although the stocks in the index are not lousy, non-performing state-owned companies, they are not stocks that offer robust growth in earnings, either. The CPSE index is hugely tilted towards the energy sector, with ONGC constituting 26% of the index. “Still, these companies are fundamentally sound and are trading at historic lows,” says Kumar. Those lows, however, don’t mean much because there’s a reason for them. Interest in PSU shares has been continuously on the decline either because these companies are in regulated sectors or they are unable to hold up against private competition in their respective segments. Both put questions marks on the future. 

While the government benefits from the scheme as it has an additional channel to offload its shares at a time when investors are becoming increasingly demanding and having taken the bait, creating these artificial incentives is fraught with complications. Institutional investors are savvy and may understand how to time entry and exit, but retail investors run the risk of losing the plot completely. Kumar says if investors have made an informed choice about the incentives, they won’t be disappointed. He is also equally firm that the product may not see sustained interest once the incentives with the initial offer are no longer available. That had better be the case because if the scheme becomes a norm, it will only distort markets.