Understanding the CPSE ETF and how to use InvIT in it - Motilal Oswal
Understanding the CPSE ETF and how to use InvIT in it - Motilal Oswal

Understanding the CPSE ETF and how to use InvIT in it

What is the CPSE ETF and how to invest in CPSE ETF in India? As the name suggests, the CPSE refers to some of the most blue chip central public sector enterprises (CPSE) in India. The CPSE ETF is run by Reliance Mutual Fund and mirrors the performance of these 10 Navaratnas PSU stocks. Like any other ETF, the CPSE ETF is also an equity security that tracks the PSU index. Additionally, retail investors in the ETF are also entitled to a special discount during the new fund offerings as well as a loyalty bonus if they stayed invested for a longer tenure. Like any ETF, the CPSE ETF can also be bought and sold in the equity market and can be held in your demat account. Trades in the CPSE ETF can be executed through your normal equity trading account. Find below the latest portfolio of the CPSE ETF as of January 31st 2018 along with the market share of the major stocks..

                                     
There are a few basic things to be understood about an ETF. The ETF corpus only increases when the government comes out with a new offering. Otherwise, the purchases and sales of ETF are matched out and the AUM does not increase. Being Navaratnas PSU stocks, the ETF boasts of a fairly high dividend yield and safety too. The expense ratio of the ETF is very low (just about 0.54% as against normal equity fund expense ratios at around 2%). If you are looking at passive exposure to PSU stocks then the CPSE ETF could be the answer.

CPSE ETF versus the Bharat 22
Many investors tend to confuse between the CPSE ETF and the Bharat 22. While both are passive ETFs floated by the government, there is a slight difference. While CPSE ETF has only 10 stocks of the Navaratnas, the Bharat 22 ETF is more diversified with 22 stocks in the portfolio. 19 out of the 22 stocks are PSU companies and the balance stocks are L&T, Axis Bank and ITC. These are the 3 stocks that the Bharat 22 ETF inherited form the erstwhile SUUTI. It may be recollected that back in 1998 when UTI plunged into a payment crisis it was rescued by the government by creating the SUUTI account. Those 3 private sector holdings of UTI have since become part of the Bharat 22 ETF portfolio. Of course, both the ETFs have underperformed the Nifty and the Sensex over the last two years as PSU companies have generally lagged the market. But the high dividend yield in the ETF, the discount offered and the blue-chip portfolio makes it an attractive bet.

Applying the concept of InvIT Funds in India into CPSE ETF
In the Union Budget 2018, the finance minister Arun Jaitley had announced plans to create an InvIT structure to facilitate an orderly sale of some of the unlisted PSU shares. This is likely to be a mix of an IPO and a strategic sale where the government will look to monetize the value of the assets much better using the InvIT route. It may be recollected that companies like IRB Infrastructure and Sterlite had closed InvIT issues last year. However, these issues are quoting at a discount to their issue price. That is more because these products were sold as equity products whereas they were actually debt products with an assured rate of return. So how will it work in practice?

Using InvIT funds in India for National Highways Authority of India (NHAI)
The NHAI is an unlisted entity which is the nodal agency for owning and managing the highways in the country. It is sitting on crores of road assets which can be better managed by building smart monetization models around them. Essentially, Infrastructure Investment Trusts (InvITs) are trusts that manage income generating infrastructure assets. These projects are then packaged, securitized and sold to small and large investors in the form of assured yield securities. But how will the NHAI leverage the InvIT model?
Remember, the NHAI owns a very large and diversified pool of infrastructure assets across the length and breadth of India. Instead of directly selling NHAI shares to investors, the better way would be to package the road assets of NHAI into distinct blocks of InvITs so that each of these InvITs can be sold to the public through the IPO route. The advantage is that the infrastructure assets can be better monetized through the InvIT route and the resultant securities can actually be sold as assured-yield debt securities with lower risk profile. For this the road assets of the NHAI will be organized into Special Purpose Vehicles (SPVs) and will use innovative monetizing structure to sell to the public.
Right now, this idea is still at a plenary stage and it remains to be seen how it will be implemented. It will surely represent a big leap towards combining the power of InvITs and ETFs for the government of India.
 

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