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CPSE ETF Details & Should you invest in this PSU ETF?

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What is CPSE ETF

CPSE ETF (Central public sector enterprises ETF) is the new ETF launched by government which is comprised for 10 Bluechip PSU companies.

Its objective is to raise money from public & invest in the shares of PSU companies which are part of this ETF. Through this ETF government is targeting to raise Rs 3000 crores. The NFO is closing on 21-Mar-2014.

What is ETF
ETFs are like mutual funds which can be bought and sold on stock exchanges.  It is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange

What is CPSE Index comprised of?
CPSE Index has been created by including companies that meet the following criteria:

  • Owned 55% or more by the Government and listed on the NSE
  • Large PSUs (those having more than Rs.1000 crores as average free float market capitalization for 6  months period ending June 2013)
  • With a consistent dividend payment record (at least 4% for 7 years immediately prior to or 7 out of 8 / 9 years immediately prior to June 2013)

Which companies are included in the Index currently?

The 10 blue-chip PSUs which meet the above criteria and their weightages are:

  • ONGC (26.72%)
  • GAIL (India) (18.48%)
  • Coal India (17.75%)
  • REC (7.16%)
  • Oil India (7.04%)
  • IOC (6.82%)
  • Power Finance Corp. (6.49%)
  • Container Corp. (6.40%)
  • Bharat Electronics (2%)
  • – Engineers India Ltd. (1.13%)

CPSE ETF will invest the amount in the above companies as per the given weightage.
Initially, the government can disinvest a maximum of 3% stake in each of the 10 companies in the CPSE ETF.

Who will be managing this CPSE ETF ?
The scheme, to be managed by Goldman Sachs Asset Management Company, was approved by the CCEA in May last year.

What are the NFO (New Fund Offer details?

  • NFO opened on 18-Mar-2014 for anchor investors, or those investing above Rs 10 crore
  • For retail investors, NFO is open from Mar 19 to 21, 2014.
  • Minimum investment amount for a retail investor is Rs.5,000 and max. Rs.2 lakhs.
  • It will be listed on the National Stock Exchange.

As an incentive,

  • Govt. of India is offering a 5% discount to all NFO investors.
  • Retail investors will get one unit for every 15 units held as loyalty bonus if they stay invested for a year.   (additional gain of 6.66%)
  • Investments by first time equity investors in the scheme will be eligible for tax benefit under the Rajiv Gandhi Equity Savings Scheme, 2013.

When CPSE ETF will be listed ?

CPSE ETF will be listed on or before 11th April 2014

Should you invest ?

Positive factors

  • Discount of 5% to all NFO Investors
  • Additioanl loyalty for Retail investors ( 1  unit for every 15 units held if they stay invested for a year – additional gain of 6.66%)
  • Investments by first time equity investors in the scheme will be eligible for tax benefit under the Rajiv Gandhi Equity Savings Scheme, 2013.
  • Money invested in Government companies

Negative Factors

Not Diversified Enough
Normally investors should invest in diversified funds so that there is no concentrated exposure to similar companies & risks. You can also look into the thematic / sector fund if you are bullish on that sector / theme.

But CPSE ETF is strange thematic fund which is based on promoter (PSU companies) irrespective of which sector it is.
It is a concentrated fund with just 10 companies. Moreover, as per the weightage, more than 60% investment would be in only 3 companies.
Hence, this is a very high-risk fund.

Low Returns
Due to politically-motivated decisions in the last few years, PSU sector is not performing well. As on 28th Feb, its PE ratio was 9.8 as compared to around 17+ for Nifty and other broader indices. And now, while the Sensex and Nifty have returned to their all-time high levels of Jan 2008, BSE PSU index is still at only 5900 levels vis-a-vis Jan 2008 peak of 11,200.

Governance Issue related to Minority shareholders
All these companies experience Govt. control wherein the political considerations have many times overridden the economic interests of these enterprises. Strategically, in the long term, these are companies with a terrible promoter, which has never cared for minority shareholders.

Contrarian View

However, seasoned high-net worth investors can consider this fund as a “contrarian” call. Going by the logic that depressed market prices are the best time to invest, investors with high risk-appetite can possibly consider investing in CPSE ETF NFO.

Summary

As this fund is highly concentrated and PSU’s careless approach towards minority shareholders, Retail investors should avoid this PSU ETF.

Consider PSU Mutual funds

If you are keen on investing in PSU companies, you better consider PSU funds which are actively managed & much more diversified than this CPSE ETF

  • SBI PSU Fund (G)        
  • Sundaram PSU Opportunities Fund (G)
  • Religare Invesco PSU Equity Fund (G)
  • Baroda Pioneer PSU Equity Fund (G)

Update  19–Mar-2014

On 18th March, the ETF had received bids worth Rs 835 crore from 7  anchor investors, including SBI, LIC, Bharti Axa Life, GIC, National Insurance Company, The New India Assurance and United India Insurance.

As per news sites, on 19th March, there was strong retail response and as much as Rs 1,000 crore has been collected.

Update 22–Mar-2014

CPSE ETF Oversubscribed with bids over Rs 4,000 crore.  FIIs placed bids worth Rs 750 crore, while anchor investors Bharti Axa Life Insurance, General Insurance, Life Insurance, National Insurance, New Indian Assurance, United India Insurance and State Bank of India have promised to invest Rs 835 crore. The balance was subscribed by domestic companies, institutions and retail investors.

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If you have any queries related to this ETF or funds, please ask using the comments box below.

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