Government toying with the idea of exchange-traded fund for PSU shares to raise funds

NEW DELHI/MUMBAI: The government is toying with the idea of an exchange-traded fund for shares of public sector companies on the lines of Hong Kong's Tracker Fund, which has been a runaway success.

The department of disinvestment is of the view that such a fund will offer the government a stable mechanism to raise large sums of money from the market with minimal disruption to the share prices of these companies.

The idea has been mooted at a time the Centre is worried that choppy markets could make it difficult to meet its disinvestment target of Rs 30,000 crore this fiscal.

Last year, the government raised just Rs 13,894 crore from stake sales in PSUs, well short of its Rs 40,000-crore target. Even this was achieved largely through the controversial auction of ONGC shares, which was bailed out by state-run Life Insurance Corp.

However, the government hopes an exchange-traded fund, or ETF, will load the dice in its favour.

"World over ETFs have seen phenomenal growth," a government official familiar with the matter told ET. "An ETF with underlying government shares could provide an attractive investment option to investors," the official said, adding the fund would largely follow the Hong Kong model.

The Hong Kong government had in 1998 acquired substantial stakes in companies through market stabilisation operations. Fearing that market sales could destabilise equity markets, it used the stocks to set up an ETF through which it raised $4.3 billion.

Under the proposal submitted by the disinvestment department to the finance ministry, the government will provide shares of participating public sector enterprises to an asset management company, or an ETF provider, to float a fund.

The provider will create smaller units of the fund and sell them to retail and institutional investors, allowing the government to raise large amounts by selling units that have shares of state-run companies as the underlying asset.

Such a fund could allow investors to own and trade the entire basket of shares of public sector enterprises in diverse sectors.

India has 48 listed PSUs that account for about 20% of the total market capitalisation.

With a burgeoning fiscal deficit, the Centre cannot afford to miss its disinvestment target yet again.

Experts argue that an ETF will be a good option for raising capital as it can pull in risk-averse investors. The country, which got its first ETF in 2001, has 33 such funds with combined assets under management of Rs 10,850 crore.