How can the government carry out disinvestment through ETFs?

by Manshu on May 16, 2012

in Economy

I read an interesting article about the possibility of the government taking the ETF route to carry out disinvestment, and that can be a novel way to carry out disinvestment because the government did pathetically last year as far as disinvestment is concerned and things haven’t improved much since that time so it won’t be surprising if they aren’t able to do much with disinvestment this year as well.

A bit of creative thinking will help in these times and an ETF to disinvest stocks could prove very helpful in meeting the disinvestment target. This idea is based on Tracker Fund of Hong Kong fund  and they have already shown that the model works.

The way this will work is that the government will take a bunch of its listed stocks, and create a basket of shares which they will then sell to other ETF sponsors like Goldman Sachs.

They need to take companies that are already listed like Coal India because if those companies are to be part of an ETF then people need to see what the value of one unit of that ETF will be and that’s only possible if you have some frame of reference which in this case will be a listed stock.

The sponsor will then take those shares and create smaller units with them which can be bought and sold by Authorized Participants, and those APs will in turn buy and sell those shares to the general public.

People will then be able to trade the ETFs in the market and instead of buying a single stock, they can get an ETF with a bunch of PSUs.

The utility of the ETF will depend on the constituents and how low cost it can be and I’m skeptical that this will really be useful to an investor in the sense that it helps them fill a gap in their portfolio that they otherwise would have had.

Having said that, I’m fairly certain that this will do better than individual PSU stock sales because of the marketing muscle of the fund company that will combine with the buzz that’s always created when a PSU is disinvested and the novelty of this method. That alone should be enough to give enough legs to this scheme to succeed and that will be good for our cash strapped government.

{ 5 comments… read them below or add one }

Anand May 16, 2012 at 8:22 am

Good article. Overall the articles are being informative and useful. Keep it up.

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Manshu May 17, 2012 at 4:29 am

Thanks, just curious how long you’ve been reading?

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Sanjay May 16, 2012 at 8:03 pm

I haven’t gone through the link of “Tracker Fund of Hong Kong”. However, I have few questions.

price of ETF is computed from market price of its constituents. Then why not government sell individual stocks at market price?
For example, I want to buy companies from power sector only and not from oil marketing sector. By making compulsion to buy ETF instead of individual stock, government is actually decreasing the demand.

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Manshu May 17, 2012 at 4:18 am

For the same reason people buy other index funds instead of buying a Reliance or an Infosys, it helps diversify market risk when you have own 50 companies instead of 1 with the same thousand bucks.

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Sanjay May 20, 2012 at 12:52 am

One more thing: when government does FPO, it decides base price (below which it wont offer shares). Now if government sells at market price, it would not know how much money they would get by selling say 1000 ONGC shares.
Also, what if bear cartel decides to hammer out ONGC shares when this ETF is getting launched.

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