At some point in the coming ten months or so, the Government of India shall presumably make a determined attempt to sell about Rs 30,000 crore of public sector shares to investors. For obvious reasons, out of all the promoters in the country who are waiting to hit the primary markets, the government is the only one which has publicly committed itself to such an exercise. It needed to pencil in a certain amount into the Union Budget, and that amount had to be a number with enough zeros in it to have some measurable impact on the budgeted fiscal deficit.
Unfortunately, from the bits and pieces of news that have been flowing out for the last couple of months, it seems that the government has little confidence that such a campaign of stock sale can be mounted successfully. Nothing unusual about this--in the current climate, there would be few promoters who would have any confidence in being able to collect large amounts of cash from investors.But for the government, the alternative of raising debt is already a problem. The other (real world) alternative that a promoter would try—getting group companies to subscribe to failing issues (as in the ONGC-LIC affair) also has its limits, even though those limits are likely to be tested and stretched in the coming months.
As a result, one keeps hearing of various innovative ways in which public sector shares could be sold to the public. For example, one idea that has been around in the media recently is that of creating an exchange traded fund (ETF) of public sector stock. Then, as and when market conditions permit, units of the ETF could be sold off to investors in a dribs and drabs as and when market conditions permit.
On paper, the ETF sounds like an idea that is workable because it would prevent a situation whereby stocks would have to be brought on to the market in big chunks. Unfortunately, from an investors’ perspective, there’s a big problem with the PSU ETF idea—public sector companies, as a group, are no one idea of a portfolio. You see, ETFs or index funds are a great way of buying a portfolio of investments. This could be a market, or a theme or a sector. Are you positive on the Indian markets generally? Buy a Nifty ETF. Indian Bank stocks? Buy a banking ETF. And so on.
From this perspective, I’m hard-pressed to think of an investor who would want to buy and hold on to a portfolio made up of government company stocks. This would be especially true if the investor would have no control over the internals of that portfolio. PSU stocks are not a sector or a theme. They are just a bunch of diverse companies that happen to have a common promoter. To illustrate, consider an ETF based the BSE’s PSU index as it exists today. Such an ETF would distribute an investor’s money in small doses in 60 stocks, adding up to a portfolio that has no common theme.
Actually, having GOI as a promoter is a common theme but one that today’s investors will see as adding nothing but the risk of mismanagement and political interference. Investors’ experiences with the oil companies and Coal India have shown that here’s a promoter who adds nothing but an unpredictable downside from the investors’ perspective.
Starting with UTI’s Mastergrowth in 1993, the last two decades has seen a handful of PSU-focused mutual funds. However, after short bursts of enthusiasm, each has fallen by the wayside, offering nothing notable to the investor. Today, PSU-specific funds manage less than Rs 1,000 crore of equity assets.
A PSU ETF would be like a thali meal. A fixed meal is a great idea but if it compulsorily combines eight kinds of rotis with yesterday’s over-salted and under-cooked vegetables then the meal is unpalatable. If the restaurant converts to a-la-carte, then some of those dishes might actually get ordered by some diners. Fundamentally, PSU stocks are a tough sell. Bundling them into an ETF, or any other stratagem is just that—a clever stratagem. What investors are looking for is a change that more genuine, and more meaningful.
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