The Idea Tussle: Who Thought up CPSE Exchange Traded Fund?

Goldman Sachs India AMC is typically credited for the idea of the hugely successful CPSE exchange-traded fund (ETF), which provides investors with a basket of 10 public sector companies. But that attribution isn’t going down well with the folks at ICICI Securities (I-Sec) who believe they were equally instrumental in the conceptualisation of the fund that received bids worth Rs 4,400 crore in its initial offer which closed on March 21. (It reopens on April 4.)

I-Sec Managing Director and CEO Anup Bagchi is too restrained to point any fingers but he is categorical about the role played by his firm, which is the advisor to the government on the ETF. He wants it known that the idea was conceived in his office.

“My team had worked on the concept and decided on the 10 stocks that will be part of the ETF,” Bagchi says, adding that his team had earlier created a 30-stock index for the public sector ETF. He had later reduced the number to 10 as not enough companies matched the criteria. Creating the product was a gruelling task but “this was one product that will change the way people look at ETFs in India”. “It is a one of a kind in the world,” he says.

Of course, Bagchi gives some credit to Goldman Sachs, which will finally manage the product, but is clear that the heavy-lifting was done by his firm.

 Sanjiv Shah, co-chief executive officer at Goldman Sachs AMC, laughs off this notion. As far as he is concerned, the advisor (I-Sec) arrived at the scene after the original idea was conceived. While Bagchi avoids dwelling on the origin of the idea, Shah focuses on it. “We started Benchmark Mutual Fund with the sole objective of launching ETFs in the Indian markets much earlier,” he says, pointing out that he launched the first-ever ETF in India on the Nifty index in 2002, after the dotcom bust.

He had started toying with the idea of an ETF based on public sector companies way back in 2004. Later, he saw huge success with the banking and the gold ETFs and did not pursue a PSU ETF.

When Goldman Sachs took over Benchmark Mutual Fund in July 2011, Shah revisited the idea one more time. In February 2012, he met the disinvestment secretary, ministry of finance, Mohammad Haleem Khan, and explained the concept to him. “I told him that instead of going for disinvestment of single companies, it made sense to do it by using an ETF kind of a structure,” Shah says.

 Shah even produced a prototype to highlight its relevance elsewhere in the world. He based it on the Tracker Fund of Hong Kong, which had a structure based on the Hang Seng index. It was created by the government of Hong Kong in 1999 after the stock market had crashed, at the height of the Asian financial crisis.

 Contrast this with Bagchi who believes that the Indian ETF is an original, and unlike any other in the world. “I executed whatever was mentioned in the request for proposal (RFP) document, which clearly states that we are the ones who will create the ETF,” says Bagchi.

 However, the RFP only followed the ideation process, points out Shah. And this took shape in Boston, when the minister was invited to a roundtable, which included an investment banker from Goldman Sachs India. It was here that the idea of the CPSE ETF was discussed at length.

 When Khan came back to India, he decided to put out an RFP for an advisor and later for AMCs. ICICI Securities was appointed the advisor and later Goldman Sachs India AMC the ETF manager.

“We keep talking to various finance professionals. The idea of the CPSE ETF is owned by the government. But there are various stakeholders, like Goldman Sachs India AMC and IISL. ICICI Securities is our advisor, which came in earlier,” says Alok Tandon, joint secretary in the department of disinvestment.


Why CPSE ETF is so successful?

• The CPSE ETF gives investors an opportunity to buy shares in public sector bluechip companies at 5 percent discount on their market price; 10 PSUs that comprise the fund include ONGC, GAIL, Coal India, IndianOil, Oil India, Power Finance Corp, Rural Electrification Corp, Container Corp, Engineers India and Bharat Electronics.
• These investments will have a dividend yield of around 4.5 percent. There is also a long-term incentive for those who want to hold on to the ETF for more than a year: Investors will be given an extra share for every 15 shares held by them at the end of one year.
  
  
  Read the Full Interview with Sanjiv Shah and Anup Bagchi