Prime Minister Narendra Modi is looking to raise up to 7,500 crore rupees by selling stakes in 10 public sector companies as the government races against time to catch up with its own budgetary estimates on divestment.
The Finance Ministry has launched the second tranche of exchange traded funds that have Central Public Sector Companies (CPSE) mainly from the energy, metals and financial services sectors. The issue opens of January 18 and closes on January 20. The ETF, a type of equity mutual fund, will be listed on both the National Stock Exchange and the Bombay Stock Exchange on or before February 10.
Companies that are a part of the ETF are ONGC Ltd., Coal India, Indian Oil Corp, GAIL India. Power Finance Corp, Rural Electrification Corp, Container Corp of India, Bharat Electronics, Oil India and Engineers India Ltd. The second issue comes on the back of the first CPSE ETF that was launched in March 2014 and the government raised 3,000 crore rupees from that ETF, which rose 12.2 percent each year since launch.
The government owns at least 55 percent stake in each of these superb quality“maharatna'' companies which are dividend paying assets and have given bonuses from 2006 onwards. It augurs well for shareholders that these corporates enjoy large competitive moats, monopoly positions and full government support in their businesses.
An ETF has a certain number of companies in its corpus. Generally the lower threshold is of 10 names and the many ETFs contain more than 100 companies. Each ETF tracks a particular index and the fund manager's performance is gauged on how intimately can he or she mimic that index's movement. In this case, the benchmark for the CPSE ETF II is the NSE CPSE Index which is trading at its highest level since July 2015. This index fell 0.3 percent to 2,489 points on Monday.
Nearly all the companies that are a part of the CPSE ETF II are trading near 52-week highs primarily on two counts. All stocks in the energy space are in a strong uptrend because the underlying asset — global crude oil — is trading around 18-month highs of about $53 a barrel. Most analysts tracking the international oil market are hopeful that crude oil prices are headed higher in the coming quarters as the oversupply gets phased out from the sector.
The second reason is that investors in the demonetization era are buying stocks where revenue streams, profit and profitability are mostly guaranteed through government action and support, and PSU companies fit that bill perfectly.
Meanwhile, retail investors can deploy as little as 5,000 rupees in the issue and the proposed pricing will have a premium amount which is yet to be calculated. The government offers a discount of 5 percent on the price decided upon to retail buyers, who also enjoy at 70 percent allocation of the issue. The remaining 30 percent is meant for large investors.
It would make sense to have up to 5 percent of your overall portfolio devoted to this ETF mainly on account of expectations that global crude oil prices are headed higher. If you are a first time investor in the markets, then stick to buying a simple equity diversified fund.