Indian Govt. Abandons ETFs For PSU Disinvestment Strategy

The Union finance ministry is changing its strategy for disinvestment in public sector enterprises (PSEs) and will no longer rely on exchange-traded funds (ETFs). This decision comes as a response to concerns about oversupply and minority shareholders wanting to exit. It's worth noting that the government has not issued any ETFs in the last three years.

Exchange-traded funds (ETFs) are investment securities that track an index and are traded like stocks on an exchange. The government had previously used ETFs as a tool for disinvestment, allowing it to divest stakes in multiple central public sector enterprises (CPSEs) through a single offering in a non-disruptive manner.

Through various tranches of ETFs, including the CPSE-ETF and Bharat 22 ETF, the Centre had successfully raised over Rs 1 lakh crore. The CPSE-ETF was approved in May 2013 and included stocks of listed CPSEs with disinvestment up to 3 per cent of the Government of India's shareholding from an individual CPSE constituent of ETF. It consisted of 10 scrips, including companies like Coal India, Concor, Indian Oil, ONGC, and REC.

The Bharat 22 ETF was launched in December 2017 and comprised shares of key CPSEs, public sector banks, and government-owned shares in blue-chip private companies like Larsen & Toubro (L&T), Axis Bank, and ITC.

However, the annual report of the Finance Ministry had raised concerns about the limited scope for disinvestment through existing ETFs. Many underlying stocks in CPSE-ETF and Bharat 22 ETF had reached close to 51 per cent of Government of India equity, and some stocks were no longer available for disinvestment due to strategic disinvestment or other reasons. Additionally, there was concern that large and repeated tranches of Equity ETFs were discouraging investors in PSU stocks due to price overhang.