The Department of Disinvestment wants mutual funds to spend a minimum Rs15 crore towards marketing and advertising expenses for the NFO for public sector ETFs. The regular practice is to spend a little over Rs5 crore, that too only in a rising market
The Disinvestment of Department (DoD) of the Union government is hell-bent on failing in yet another another effort at disinvestment after its botched up efforts in the 2010-13 period. The new idea is to launch an Exchange Traded Fund (ETF) for Public Sector Units (PSUs). For this, asset management companies (AMCs) that run mutual funds, have been asked to bid for creating the ETFs and market them to the investors. However, the know-all and imperious DoD wants AMCs to commit themselves to a minimum of Rs15 crore towards marketing and advertising expenses.
Typically, an AMC, during the heydays, spent about 5% of the fund cost towards marketing and advertising. For higher sums collected the percentage goes down. While the AMCs spend a little over Rs5 crore for marketing a new fund offering (NFO) of an equity-oriented scheme, for ETFs the expenses are less than Rs3 crore. And this too, when the markets are on the rise.
At present, the markets are down and yet the DoD’s insistence has left no option for many AMCs but to opt out from the race. According to a report from the Business Standard, of the six AMCs that have shown interest in launching the CPSE ETF, only two—Goldman Sachs AMC and UTI Mutual Fund—made presentations before the inter-ministerial group. The other four, which had planned to join the race, were DSP BlackRock, Kotak MF, Reliance MF and SBI MF, the report says.
The government’s efforts to disinvest its stake in PSUs has failed miserably over the past three years because the babus who have overseen them had only one objective: maximise the cash collected from disinvestment at the expense of investors. This meant that the officials have consistently ignored the views of capital market professionals and have ended with trying to disinvest the shares of wrong companies, at the wrong time and at the wrong prices.
The same attitude continues. The DoD in its request for proposals (RFP) says, “The selected AMC/ETF provider shall incur marketing/advertising expenses to the extent of at least Rs15 crore, under NFO expenses, for the CPSE ETF. The AMC/ETF provider may incur marketing expenses under NFO expenses, over and above this stipulated amount. The key expenditure heads and the item-wise amounts to be spent under this head shall be finalized and approved by the government, in consultation with the AMC and the advisor. It may be noted that these expenses shall be devoted only towards marketing activities and are in addition to the expenses which shall be borne by the AMC.”
This is excluding the payments or incentives the AMC would have to pay to distributors and brokers. In addition, the selected AMC will pay statutory expenses or fees as applicable, payments to depository, cost for creation and maintenance of index and any other cost for creating and launching the ETF.
The proposed CPSE ETF will serve as an additional mechanism for the government to monetize its shareholdings in listed CPSEs that eventually would form part of the ETF basket. ICICI Securities is advising the DoD in launching the CPSE ETF.
For FY13, the government had fixed Rs30,000 crore as disinvestment target. Till February 2013, it was able to realise Rs21,504 crore through stake sale in five companies including NBCC, Hindustan Copper, NMDC and NTPC.