We are at the fag end of the current financial year and as always, the government is doing everything it can do to meet its revised target of garnering disinvestment proceeds. It had set a highly ambitious target of raising Rs. 40,000 crore from disinvestment in the beginning of this financial year, but then curtailed it by more than 50% to Rs. 16,027 crore last month in February 2014. I hope it doesn’t fail in its efforts to meet even this revised target.
Before we move forward to know more about our target subject, we need to have some basic understanding of a new index, called CPSE Index, which has been launched by the National Stock Exchange (NSE) and owned & operated by India Index Services & Products Limited (IISL).
NSE CPSE Index
NSE today launched CPSE Index, in which CPSE stands for central public sector enterprises. As the name suggests, this index comprises of some of the big public sector enterprises and here you have the list of those companies.
CPSE Index Composition as on February 28, 2014 & Trade Data as on March 19, 2014
CPSE Index has been launched for a specific purpose and the purpose is to facilitate Government of India’s initiative to sell its stake in some of these CPSEs. In fact, the finance ministry wants to raise an additional Rs. 3,000 crore for its disinvestment programme this financial year and it will be using this CPSE ETF to garner its targeted amount.
CPSE Index has base date of 1st January, 2009 and base value of 1,000. As mentioned above, this index got launched today and stood at 1,898.10 by the end of today’s trading hours. The weights of its constituents will be re-aligned every quarter effective 2nd Monday of February, May, August and November every year.
Goldman Sachs CPSE Exchange Traded Fund (ETF)
Goldman Sachs CPSE ETF is an open-ended index scheme, to be listed on the stock exchanges in the form of an Exchange Traded Fund (ETF) tracking the CPSE Index. This ETF has been launched by Goldman Sachs Asset Management Company Limited and is named as Goldman Sachs CPSE ETF. It is also known as the PSU ETF.
The government of India has authorised only Goldman Sachs to launch this ETF. I would call it GS CPSE ETF or just CPSE ETF for the rest of this post.
Anchor investors have already invested Rs. 850 Crore in this ETF today, so this scheme would require another Rs. 2,150 crore to meet its targeted amount.
Out of the proceeds collected during the NFO period, this scheme intends to purchase the CPSE shares, as represented in the constituent companies of the CPSE Index, in similar composition and weightages as they appear in the CPSE Index. The President of India, represented through different departments and ministries, will sell the shares at a discounted rate to the scheme and the mutual fund will in turn create and allot units of the scheme to its investors.
Subsequently, after the closing of the NFO, the units will get listed on the stock exchanges in the form of an ETF tracking the CPSE Index.
Investment Objective – The scheme intends to generate returns that closely correspond to the total returns earned by the securities as represented by the CPSE Index. However, the performance of the scheme may differ from that of the CPSE Index due to tracking error and also due to scheme expenses.
NFO Opening & Closing Dates – For the non-anchor investors, this fund will open for subscription from tomorrow i.e. March 19th and will run for three days to close on March 21st.
Features of GS CPSE/PSU ETF
Reference Market Price/NAV – New Fund Offers, or popularly known as NFOs, normally get launched at Rs. 10 per unit as their NAV. This will not be the case with this scheme. During the NFO, each unit of this scheme will have a face value of Rs. 10 and will be issued at a premium, equal to the difference between the face value and the allotment price.
NAV of this scheme will be based on the CPSE Index, as the allotment price would be approximately equal to 1/100th of the CPSE Index and would be calculated post adjusting the 5% discount offered by the government to CPSE ETF for buying the underlying CPSE Index shares.
Going by the CPSE Index’ closing value of 1898.10 today, the allotment price of this scheme should get fixed at around Rs. 18 per unit once the allotment gets done. So, if you decide to invest Rs. 1.80 lakh in this scheme, you will be getting approximately 10,000 units of GS CPSE ETF.
5% Discount for Investors – Investors making an investment during the offer period will be given a 5% discount on their investment. This 5% discount on the “Reference Market Price” of the underlying CPSE Index shares will be offered to CPSE ETF by the government of India.
1 Loyalty Unit for Every 15 Units Held – Sops don’t stop with just 5% discount. The investors, who remain loyal to this scheme and hold on to their investments for one year from the date of allotment, will be allocated 1 additional unit for every 15 units held on the record date in March/April 2015. Record date will be determined as the date falling exactly one year from the date of allotment.
Loyalty units would be credited to the demat account of the eligible investors within 30 days from the record date. Non-retail investors will not be offered loyalty units under this scheme.
3.5% Dividend Yield – Based on the dividend paying pattern of these CPSEs, the dividend yield works out to be in the range of 3.5% to 3.8%. Though I do not give much weightage to dividend yield for my personal investments, I think a healthy dividend yield of 3.8% reflects that there is reasonable margin of safety with these companies and downside in their market prices is fairly limited.
10.5X PE Ratio – Price to earnings ratio (P/E Ratio) of CPSE Index is ruling at around 10.5 times these days, which is a steep discount to its historical averages and also a steep discount to Nifty’s P/E multiple of approximately 18.2. This makes CPSE ETF quite attractive from valuations point of view.
Minimum/Maximum Amount to be Raised – The scheme seeks to collect a minimum target amount of Rs. 100 Crores during the NFO Period. Maximum amount to be raised stands at Rs. 3,000 Crores, beyond which the money will be returned back to the investors.
Minimum/Maximum Investment Size – Retail individual investors can invest in the scheme with a minimum investment amount of Rs. 5,000. To remain a retail investor, the investment limit has been set at Rs. 2 lakhs.
Listing – Goldman Sachs has obtained an in-principal approval of NSE and BSE for listing the units of this scheme and the listing would be carried out by the fund house on or before 11th April, 2014.
Demat Account Mandatory – As this is an ETF, the units of the scheme will be available only in the dematerialized/electronic mode. So, you have to mandatorily have a demat account to own its units. Applications without relevant demat account details are liable to be rejected.
Tax Saving u/s. 80CCG – GS CPSE ETF is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme (RGESS) and thus qualifies for a tax exemption up to Rs. 25,000 under section 80CCG.
As many of you would know, to avail tax benefit u/s. 80CCG, there are two most important conditions. One, your gross total income should not exceed Rs. 12 lakh mark and second, you must be a first time investor in equities. Though it is quite difficult to satisfy both these conditions simultaneously, people who fulfil both these conditions should actually avail tax benefits with this scheme.
Lock-In Period – Investors, who seek tax exemption u/s. 80CCG, will be subject to a lock-in period of 3 years – 1 year of fixed lock-in and 2 years of flexible lock-in. The fixed lock-in period will start from the date of your investment in the current financial year and will end on March 31st next year i.e. 2015.
The flexible lock-in period will be of two years, beginning immediately after the end of the fixed lock-in period i.e. beginning April 1, 2015 till March 31, 2017.
There is no lock-in period applicable for those investors who don’t avail any tax benefit. But, then it is advisable to hold on your investment for one year in order to get loyalty units.
Entry & Exit Load – There is neither any entry load nor any exit load with this fund.
Categories of Investors & Allocation Ratio
Anchor Investors – 30% of Rs. 3,000 Crores i.e. Rs. 900 Crores
Non-Anchor Investors, including Retail Individual Investors, Qualified Institutional Buyers (QIBs) & Non Institutional Investors – 70% of Rs. 3,000 Crores i.e. Rs. 2,100 Crores
As the anchor investors have already poured in Rs. 850 crore, the leftover pie of Rs. 2,150 crore will be available for the retail individual investors, qualified institutional buyers (QIBs) and non-institutional investors.
Fund Manager – This scheme will be managed by 33-years old Payal Kaipunjal, who is an MBA from Wellingkar Institute of Management and also a Financial Risk Manager (FRM) from GARP University. She has a total experience of 9 years and worked with Benchmark Asset Management Company before it got acquired by Goldman Sachs India in 2011.
She has been working with Goldman Sachs since August 2011 and has been managing GS Junior BeES, GS PSU Bank BeES and debt securities portfolio of GS Hang Seng BeES.
High Exposure to Energy Sector – CPSE Index has an exposure of approximately 59% to the energy sector, with stocks like ONGC, GAIL, Oil India and Indian Oil. So, if not exactly a sector fund, this ETF is highly tilted towards the energy sector.
High Exposure to Public Sector Managements – We all have been hearing of policy paralysis for a very long time now. All these companies are public sector enterprises, in which we all know how policies get framed out and implemented, how things get executed and how good their managements are. So, despite of cheap valuations, it is a big risk if things don’t move as expected.
Passive Management – ETFs are passively managed funds and their performance largely depends on the index they track. As GS CPSE ETF will track the CPSE Index, its performance will completely hinge on the performance of the constituents of CPSE Index. So, in case there is trouble with any of these companies, the fund management will not be able to sell that particular stock till the time the stock moves out of this index.
CPSE Index constituents have risen 8.91% in the last 30 days, while they have given a negative return of 2.44% in the past one year. Going by the valuations of these CPSEs and the number of sops this ETF will offer to its retail investors, I think it is giving a great opportunity to the long-term conservative equity investors, who still have a belief that the future holds some kind of promise or scope of improvement for these CPSEs and still have some kind of faith in the policy execution of the next government.
Personally, I would like to invest some part of my money into this ETF as I think most of these CPSEs are quoting at a steep discount to their life time highs and also to their historical average PE multiples. Though the stock prices of these CPSEs have run up quite rapidly in the last month or so, I still think there is enough value in these companies.
Also, I am hopeful of a strong government taking charge at the centre as the election results get announced in May. I think a strong, decisive government can have a dramatic effect on the sentiment driving the stock prices of these CPSEs.
Also, as a human nature, discounts and freebies attract me as well. I think 5% discount and a bonus unit after one year of investment are reasonably good attraction triggers for me.
Investors, who do not have a demat account and wish to save tax under section 80CCG, will have only 3 working days for them to get a new demat account opened in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme and invest in this scheme. So, please hurry and avail the benefits of this scheme.