Reliance MF CPSE ETF Further Fund Offer (FFO) 2 – March 2017 Issue – Click Here
This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at firstname.lastname@example.org
In an attempt to meet its disinvestment target for the current financial year 2016-17, the government of India has decided to launch one more tranche of the CPSE ETF to raise Rs. 6,000 crore by selling its partial stakes in some of the listed public sector undertakings (PSUs). The first tranche of the CPSE ETF got launched during the tenure of the UPA government in March 2014 and it successfully raised Rs. 3,000 crore from various investors. This second tranche is getting launched this week on January 17 and would remain open for four days only to close on January 20.
While January 17 subscription is reserved for the Anchor Investors, retail investors and other non-anchor investors would be able to submit their applications starting January 18. Once successfully allotted, its units are expected to get listed on the stock exchanges on or before February 10.
CPSE Nifty Index – It is one of the indices of the National Stock Exchange (NSE) carrying 10 public sector undertakings (PSUs) in which the central government has more than 55% stake and these companies have more than Rs. 1,000 crore in market capitalisation. All these companies are profitable and are either Maharatnas or Navratnas.
CPSE Index Composition as on December 30, 2016 & February 28, 2014
CPSE Index Composition as on December 30, 2016 & Trade Data as on January 13, 2017
CPSE ETF or Central Public Sector Enterprises Exchange Traded Fund – This ETF got launched in March 2014 by Goldman Sachs Asset Management Company and listed in April 2014 on the stock exchanges. While the retail investors got its units allotted at Rs. 17.45, it quickly touched a high of Rs. 29.82 in less than 2 months in May 2014 when there was a euphoria after Mr. Modi took charge to serve this big nation as the PM. However, even after more than two and a half years, this ETF has not been able to cross its previous highs made during that euphoric period and is currently trading at Rs. 26.87 a unit.
FFO Opening & Closing Dates – For Anchor Investors, this fund will open for subscription from January 17 and for non-anchor investors i.e. retail investors, QIBs and non-institutional investors, subscription will start from January 18. This FFO will remain open for four days only to close on January 20.
Features of CPSE ETF Further Fund Offer (FFO)
High Dividend Yield & Reasonable Valuations – All the constituents of the CPSE Index are profitable and pay reasonably high dividends on a regular basis. Though high dividend yield does not guarantee positive returns, but it reduces volatility in returns as downside in their market prices gets fairly limited. Moreover, I think these CPSEs are trading at reasonably fair valuations and bold reforms, if taken post elections, could result in unlocking value for their shareholders.
5% Discount for Investors – Like most public offers of government companies, this FFO will also offer a 5% discount to the retail investors as well as other categories of investors. This 5% discount will be calculated on the “FFO Reference Market Price” of the underlying shares of the Nifty CPSE Index and will be passed on to the CPSE ETF by the government of India.
Reference Market Price/NAV – As mentioned above, CPSE ETF is currently trading at Rs. 26.87 on the stock exchanges. This is also its reference market price or NAV. As the investors get allotment and FFO units get listed on the stock exchanges, market price of each unit of this ETF will be linked to the Nifty CPSE Index and its returns would be quite close to the returns generated by the CPSE Index. Investors will get their units allotted post an adjustment of 5% discount offered by the government to CPSE ETF for buying the underlying CPSE Index shares.
Investment Objective – The scheme intends to generate returns that closely correspond to the total returns generated by the Nifty CPSE Index, by investing in the securities which are constituents of the Nifty CPSE Index in the same proportion as in the index. However, the performance of the scheme may differ from that of the Nifty CPSE Index due to tracking error, scheme expenses and the initial discount of 5%.
Unlike NFO, No Loyalty Units in FFO – Retail investors in April 2015 received 1 additional unit as bonus against their investment of 15 units of CPSE ETF, as a reward for being loyal to this scheme for one full year from the date of allotment. However, the current scheme does not offer any such loyalty units this time around and that makes it slightly unattractive to me.
Minimum/Maximum Amount to be Raised – This ETF would target to raise Rs. 6,000 crore during this 4-day offer period, including the green-shoe option to retain Rs. 1,500 crore over and above the base target of Rs. 4,500 crore. However, in case of oversubscription beyond Rs. 6,000 crore, partial allotment will be made to the investors.
Minimum/Maximum Investment Size – Individual investors can invest in the scheme with a minimum investment amount of Rs. 5,000 and there is no upper limit on the investment amount. However, in order to get preference in allotment as a retail investor, you need to keep your investment amount capped at Rs. 2 lakhs.
Allotment & Listing – As per the offer document, units of this ETF will get allotted within 15 days from the closing date of the issue and listing on the NSE and BSE will happen within 5 days from the date of allotment. However, I expect the allotment and listing to happen sooner than these indicative times.
Demat Account Mandatory – As this is an exchange traded fund, the units of the scheme will be available only in the dematerialized/electronic form. So, you need to mandatorily have a demat account to apply for its units. Applications without relevant demat account details are liable to get rejected.
Tax Saving u/s. 80CCG – This FFO is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme (RGESS) and thus qualifies for a tax exemption of up to Rs. 25,000 under section 80CCG. However, most of the investors would find it difficult to fulfill its two most important conditions to avail this tax exemption. These two conditions are – one, your gross total income should not exceed Rs. 12 lakh in the current financial year and two, you must be a first time investor in equities. Though it is quite difficult to satisfy both these conditions together, people who fulfil both these conditions can avail tax exemption u/s 80CCG by making an investment of up to Rs. 50,000.
Lock-In Period with Tax Exemption – 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. 2018.
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, 2018 till March 31, 2020.
No Tax Benefit Availed – No Lock-In Period – Investors who do not avail any tax benefit out of this ETF, would be free to sell their holdings any time they desire to do so. There is no lock-in period applicable to those investors. However, in order to avail long term capital gain tax exemption, it is advisable to hold on to your investments for at least one year.
Entry & Exit Load – You are not required to pay any entry load or exit load with this fund.
Categories of Investors & Allocation Ratio
Anchor Investors – Maximum 30% of Rs. 6,000 Crore i.e. Rs. 1,800 Crore will be allocated to the anchor investors.
Retail Individual Investors – After the anchor book gets over on January 17, retail individual investors are allowed to take up all of the remaining portion of this FFO whatever remains left out of Rs. 6,000 crore i.e. 70% of Rs. 6,000 Crore i.e. Rs. 4,200 Crore + under-subscribed portion of Anchor Investors.
Qualified Institutional Buyers (QIBs) & Non-Institutional Investors (NIIs) – QIBs and NIIs will have nothing reserved for them in this FFO. They will be allotted units of this FFO only if the subscription numbers of the retail investors and/or anchor investors fall short of their reserved quota.
Fund Manager – There has been no change in the fund manager of this ETF. As it was the case with this ETF at the time of its NFO, its 36-year old fund manager Payal Kaipunjal, who is an MBA from Wellingkar Institute of Management and also a Financial Risk Manager (FRM) from GARP University, will continue managing this ETF with further infusion of funds. She has a total experience of 12 years and worked with Benchmark Asset Management Company and then Goldman Sachs India before it got acquired by Reliance AMC in 2016.
High Exposure to Oil & Gas Sector – CPSE Index has an exposure of approximately 57% to the oil & gas sector, having ONGC, GAIL and Indian Oil as 3 of its top 4 constituents. So, any adverse event for the oil & gas sector might result in a sharp fall in the stock prices of these companies resulting in negative or low returns for the CPSE ETF.
High Exposure to Public Sector Enterprises – Public sector enterprises are often used by the governments to either bridge their fiscal deficit targets or to meet any of their political obligations. Moreover, managements of these companies are often driven by objectives other than value maximisation for shareholders. As their objective of adding value to shareholders gets diluted, it becomes a pain point for the shareholders. So, the investors need to consider this as a big risk for their future returns.
Passive Management – ETFs are passively managed funds and their performance largely depends on the index they track. As CPSE ETF tracks the CPSE Index, its performance will completely hinge on the performance of the constituents of the CPSE Index. So, there is little scope for the fund manager to show her skills in picking high growth stocks and outperform the benchmark index in a significant manner.
Should you invest in this FFO of CPSE ETF?
I covered the NFO of CPSE ETF in March 2014 and recommended investors to invest in it for a few reasons – 5% discount to the investors, loyalty units after holding it for more than a year, depressed valuations of its constituents at that time and most importantly, hope of a strong government at the centre taking bold measures to turnaround these CPSEs and make their managements run them professionally.
Compounded Annualised Returns as on December 30, 2016
While many factors have turned in favour of these CPSEs and in a way the CPSE ETF investors and we also have a reasonably strong government at the centre with a clear majority, I think we are yet to have desirable results for our investments. I think there is still a lot of scope of making these companies truly competent and add a significant value to their stakeholders. I strongly feel that it is not the job of the government to run many of these businesses and hence most of these companies should be sold to the private players strategically.
This government has recently taken a decision to sell its 26% stake in BEML, after which the government’s stake will come down to 28%. I think it is a great move by the government and I strongly wish to see many such decisions get taken after the upcoming elections in five states. If this government succeeds in increasing the pace of reforms in the last two years, then I think it would not be difficult for these CPSEs to generate 50-100% returns for their investors in the next 2-3 years.
From investors point of view, it would have been great had the government offered issuance of loyalty units in a similar manner as done earlier, but it is still not bad to have a 5% discount. I think running these companies in a professional manner and making their managements accountable for their duty of creating value for their shareholders is much more important than offering loyalty units or any such freebies. I still have high hopes from this government and on the basis of that, I would invest some part of my money in this offer and would advise my clients also to take some exposure to this ETF.
Application Form – CPSE ETF FFO
For any further info or to invest in the CPSE ETF Further Fund Offer (FFO), you can contact us on +91-9811797407 or mail me at email@example.com
100 thoughts on “CPSE ETF Further Fund Offer (FFO) – January 2017 Issue”
What is your recommendation ?
I have got a refund of a few rupees from the FFO after allotment.
Why is that?
Also,amount alloted in two accounts ..me and my son …is the same…But the refund amount varies.
I have received Rs 7.61 and Rs 12.05
My son has received only .44 paise
Why is that?
CPSE ETF units have been allotted in whole nos., so refund is for partial units.
I have angel demat account but I have subscribed through reliance mutual fund website online. how I’ll be notified? will it be under reliance or angel?
CPSE ETF units will get credited to your Angel demat account. You will get allotment intimations through SMS/mail on your registered mobile number/email id.
Thanks a lot for info.
when will the allotment be declared ?
is te issue oversubscribed ?
Allotment will be made anytime on or before February 3.
Is the 5% discount only for Retail investors ? Can you please re-confirm this, as I could not find this written in the brochure.
Instead, in paragraph titled “Discount Offered by GOI to FFO of the Scheme”, the following is written :
“A discount of 5% on the “FFO Reference Market Price” of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme by GOI.
The purchase from GOI would be out off the FFO Proceeds received by the Scheme towards Subscription of its FFO Units by ALL the category of Investors.”
According to my understanding, the above sentences indicate that purchase of shares from GOI at 5% discount will be from the proceeds of subscription by ALL categories of investors. Therefore, all investors would get the units at discounted price.
You are right, the government has offered 5% discount to all categories of investors, and not just the retail investors. Just reconfirmed it from this link – http://pib.nic.in/newsite/PrintRelease.aspx?relid=157562
Apologies for the inconvenience caused, if any. However, retail investors investing not more than Rs. 2 lakhs will get preference in allotment over other categories of investors.
What documents we have to submit to avail tax benefit ?
You need to submit your DP holdings statement of RGESS portfolio for claiming tax exemption.
CPSE ETF oversubscribed 2-times, gets bids worth Rs 12,000 crore – http://economictimes.indiatimes.com/markets/stocks/news/cpse-etf-oversubscribed-2-times-gets-bids-worth-rs-12000-crore/articleshow/56690290.cms
Thanks Shiv,do we have break-up of retailers oversubscription?
No info or break up has been provided by Reliance AMC about subscription nos.
any info on subscription levels…………………..?
This ETF has nearly 60% of its holding in the Oil and Gas Sector. During last 2 years the Crude import prices were drastically down, which helped it to maintain the NAV at the current level. But the Crude prices already showing an increase due to production cuts announced by major producers, will it be possible for the Fund to generate good returns in future, without diversifying its portfolio (which may not be possible due to CPSE label). Please clarify.
Already responded above Mr. Nair!
When will CPSE ETF units will be allotted..?
I have applied for Rs 50000 online(HDFC sec) and this amount has already been debited from account.
These units are expected to get allotted on or before February 6.
Excellent article and thanks for replying to all comments.
Global crude prices are under pressure after US shale production going up. If crude price dips below $50, CPSE index may dip as well. If you look at CPSE ETF chart for last 2.5 years, lowest point was last year around Rs 18.70 (26 Feb 2016). So 5% discount is nothing, because CPSE index and CPSE ETF rallied with crude price. 5% could be fluctuation in a day for ETF’s price. So only benefit is this 5% discount (and that is only for <2 lacs application), it is too much risk. Today ETF is trading at Rs 26.80 and all time high is Rs27.38. So it is almost trading at all time high. If govt can't boost PSUs profit somehow, downside risk is more than upside. Just my opinion.
Thanks Amit for sharing your thoughts!
Dear Amit, Your views are very valid.
On a bad market day, one can get ETF at the same or even lower rate. However as Shivji explained in analysis, one should look for long term investment.
So when ever there is a market opportunity one can accumulate on long term basis.
Now ETF is trading at peak as you said and that is the very reason, Govt. offloading this time.
In ShareKhan’ NFO – NEW FUND OFFERS… i can only see “Reliance CPSE ETF – Growth” is this the same ?
Yes Venu, it is the same CPSE ETF.
Is there a place where I can see live retail subscription levels for the FFO?
Unfortunately, there is no such mechanism available to have these figures.
You are welcome Neel!
Very confused. You had recommended that to get full allotment in case of oversubscription ..better to apply for 5000 units.
I did that through asba at hdfc securities but it blocked only 5000 rs and it was showing floor price as only 1
The actual price was not showing.
What do I do now…will I get allotted 5000 units?
Can I rectify
You can place multiple applications also in this FFO. So, if HDFC Securities allows you to place more than 1 application, then you should go for it. If not, then try submitting a physical application.
Thank you for your prompt reply.
May the Universe continue to provide you the energy so you may help us and many more!
So now if i make another application at hdfc sec online of 45000…..which hdfc sec calls 45000 units will they automatically join 5000 and 45000 and allot me units worth 50000?
Please talk to HDFC Securities ppl once, they will be able to guide you in a right manner, as they would know how their platform is working. As per my understanding, if only Rs. 5,000 got deducted from your account earlier, then you should submit another application of Rs. 45,000.
Thank you so much!
You are welcome Vanita!
Apologies for asking this question on a wrong Topic page, but can you please suggest as by when are you planning to post a blog/topic on BSE IPO? I heard that it’s due in next few days?
I would try posting the BSE IPO review by Friday or Saturday evening.
Thanks a lot Shiv. Will look forward for the same.
If I have limited money available to invest and I have to choose between CPSE ETF and BSE IPO, are there any comparable parameters between two which I should use to choose one of these?
In your view, which one is preferable?
I haven’t analysed BSE financials as yet, but I think you cannot compare these two issues. This ETF has limited upside/downside and BSE has more upside/downside than this ETF.
Hi Siv, Rather investing in this, if I invest same amount say 1 lac in these Navratna companies directly, then will it make any difference, will I get more benefits if I directly invest in those companies where this ETF will be investing? As you mentioned anyway there won’t be any active fund manager and all, so how about investing directly in those companies rather than investing in this ETF?
Firstly, if you think you can manage your portfolio in a more efficient manner than a fund manager, then you can surely save on certain expenses that a fund house charges from you for managing your money. Secondly, investing in this FFO has a big benefit of 5% discount upfront. If you think 5% discount is not a good enough attraction for you and there is some kind of price risk involved in this FFO, then you should avoid investing in this ETF.
Hi Shiv, Thanks for your reply. I do understand the value of fund manager but in this particular fund, do fund manager will really have any flexibility when companies and even portion of investment in those companies are also fixed? Like 24.4% investment is fixed in ONGC, 20.5% in Coal India etc. so everything is kind of in fixed already defined format, so what fund managers role will remain here?
Kindly suggest if I’ve misunderstood something.
Portfolio rebalancing from time to time as per the changes in the CPSE Index and dividend reinvestment on a regular basis are the most important jobs of the fund manager in this ETF. If you can do this on your own, then probably you need not require the services of a fund manager here.
Oops, seems I just realized that fixed % are of forming CPSE Index and not of this fund investment, I guess Fund manager will still have flexibility to choose the scripts of that CPSE Index and also will have flexibility to decide on investment % to invest in any of those scripts, correct?
Thanks for the detailed info. on CPSE etf. I have a small query.
I am having units of CPSE ETF from the earlier allotment. Will it be advisable to sell existing units now and buy new one or hold these units and buy more thru this FFO ?
That is purely your call. You need to decide whether you want to take additional exposure in this ETF by investing more in the FFO or your want to keep your exposure intact by selling your existing units and applying for fresh units. I think there could be a scope of some kind of arbitrage which you can take advantage of when FFO units get allotted to you.