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Nachiket Kelkar
Nachiket Kelkar

EXCHANGE TRADED FUND

Govt hopes to raise Rs 8,000 crore through Bharat 22 ETF

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The government had set a stiff target to mop up Rs 72,500 crore from disinvestments in the financial year 2017-18. With just over four months left for the fiscal year to end, the government has now taken on the ETF (exchange traded fund) to reduce stakes in some of the central public sector undertakings as well as in some private firms like ITC and Larsen & Toubro, which are part of its strategic holdings in SUTTI (Specified undertakings of Unit Trust of India).

The government is looking to raise at least Rs 8,000 crore through the Bharat 22 ETF. However, if the fund receives good response from investors, the government is open to raising beyond that amount said Anuradha Thakur, joint secretary in the divestment department.

“The overall size (of the issue) is Rs 8,000 crore. But, if we do get a good response, it has already been approved that we can go beyond that,” she said.

ETFs are passively managed mutual fund schemes tracking a benchmark index and reflect the performance of that index.

ICICI Prudential, which is the country's largest mutual fund house, will be managing the ETF. As the name suggests, the fund will invest in 22 companies across energy, banking and financial services, consumer goods, utilities and capital goods sectors.

Some of the major companies in the ETF will be National Aluminium Co (Nalco), Oil and Natural Gas Corporation (ONGC), petroleum refiner and retailer - Indian Oil, Coal India, State Bank of India - the country's largest lender, Axis Bank, Rural Electrification Corporation (REC), cigarettes to hotels major - ITC, engineering giant - Larsen & Toubro, state-owned construction major - NBCC, Bharat Electronics, NTPC and hydro power company - NHPC among others.

The new fund offer will open for subscription for anchor investors on November 14 and for others between Nov 15 to Nov 17. Those investing during the NFO period will be offered a 3 per cent discount on the reference market price of the underlying index shares of Bharat 22 ETF.

There will be a cap of 15 per cent on holding in an individual stock, apart from a 20 per cent sector level cap in the ETF.

This is the second time the government has taken the ETF route to disinvestment.

The government had launched the first CPSE (central public sector enterprises) ETF in March 2014. That fund consisted of 10 PSU stocks and it had managed to mop up Rs 8,500 crore through the issue.

According to a study, earnings growth of the S&P BSE Bharat 22 Index is seen around around 16 per cent over fiscal 2017 to fiscal 2019, compared with 14 per cent expected for the BSE Sensex and 13 per cent for the Nifty 50 index.

The ETF comes at a time equity markets are trading at near record highs. The Sensex closed 281 points or 0.8 per cent lower at 33,033 on Monday. It had hit a lifetime high of 33,865.95 on Nov 7.

Despite concerns over high valuations of India's stock markets, Nimesh Shah, MD and CEO of ICICI Prudential remains confident and noted that the companies in the Bharat 22 Index were reasonably valued, compared with the Sensex or the Nifty.

“We believe the ETF offers an attractive long term investment opportunity to partake in the India growth story by way of a diversified blend of companies spread across several sectors and are available at attractive valuation and a good subscription discount,” he said.

ETFs are treated just like any other mutual fund, and so if an investor is holding it for more than one year, there will be no long-term capital gains tax. Investors will only need to have a Demat account. The expense ratio of the Bharat 22 ETF will be 0.0095 per cent, up to a period of three years from the date the ETF is listed.

The ETF does include large cap dividend paying stocks, and could be suitable for investors, who don't want to take too many risks by directly investing in stocks. However, one must also note that some of the stocks in the ETF, particularly in the utility sector have struggled in the recent past.

Power producer NTPC, for instance, missed analysts expectations on Monday, reporting a 2.3 per cent drop in second quarter net profit at Rs 2,439 crore. Hydro power producer NHPC, last week, said quarterly net profit declined 34 per cent.

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