Union government closes ETF route for public sector firm disinvestments

In a change in its strategy, the Union finance ministry has decided to not rely on exchange-traded funds for disinvestment of stake in public sector enterprises any longer.

“We have decided to close ETF as a disinvestment tool. The CPSC ETF and Bharat 22 ETF provided large supplies of PSU shares at a discounted price and we were able to raise significant revenue through it. But it ended up leading to an oversupply and minority shareholders wanting to leave,” said an official source.

The official pointed out that the government has in fact not issued any ETF in the last three years.

An ETF is a security that tracks an index like an index fund, but trades like a stock on an exchange. The objective behind using ETFs as a disinvestment tool was that it would enable the government to divest stake in a number of central public sector enterprises (CPSEs) through a single offering in a non-disruptive manner. 

The Centre has raised over Rs 1 lakh crore through various tranches of these ETFs.

The CPSE-ETF was approved in May 2013 and included stocks of listed CPSES with disinvestment up to 3 per cent of GoI shareholding from an individual CPSE constituent of ETF. It included 10 scrips, such as Coal India Ltd, Concor, Indian Oil Ltd, ONGC Ltd and REC Ltd. 

This was followed by the Bharat 22 ETF that was launched in December 2017, which had a specially created Index S&P BSE BHARAT-22 INDEX. It comprised of shares of key CPSEs, Public Sector Banks and also government owned shares in blue chip private companies like Larsen & Toubro (L&T), Axis Bank and ITC. 

The Bharat Bond ETF comprising of AAA rated CPSEs, was then launched in December 2019 which enabled retail investors to invest in high quality PSU bonds.”

The Annual Report of the Finance Ministry had also highlighted that there is now limited scope of disinvestment through existing ETF window as many underlying stocks in CPSE-ETF and Bharat-22 ETF have reached close to 51 per cent level of GOI equity or some stocks in the ETF basket are no longer available for disinvestment due to strategic disinvestment or other reasons. “Also, there has been concern that large and repeated tranches of Equity ETF were acting as a disincentive for investors in PSU stocks due to price overhang,” it had pointed out.

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