Govt may relax rules for PSU ETF manager

Plans to issue fresh bid document, launch could be delayed to FY14

 

The government is planning to relax rules for selecting a fund manager to manage the proposed PSU ETF (public sector undertakings-based exchange-traded fund) after potential bidders stayed away due to several structural issues. The department of disinvestment (DoD) is likely to issue a relaxed Request for Proposals (RFP) soon. The move is likely to push the launch of the ETF to the next financial year. The government is proposing to launch the ETF as an alternative platform to execute its divestment programme.

Several top Indian mutual fund houses, which Business Standard spoke to, said they were not particularly keen on the mandate due to uncertain business prospects. Some chief executive officers (CEOs) said they had not even seen the original terms and conditions.

“There will be some changes in the (eligibility) criteria,” said an official familiar with the development, requesting anonymity. He, however, maintained several players had shown interest. The move follows feedback received from market players recently.

The department, advised by ICICI Securities, had incorporated several conditions for the ETF manager, including minimum assets under management (AUM) and mandate to incur marketing expenses, and had also tabulated the fee chargeable depending on the AUM of the ETF. The initial deadline for bids was January 24, which was once extended to February 8.

Dhirendra Kumar, chief executive officer of Value Research, a tracker of mutual funds, is not very impressed with the idea of a PSU ETF. “The government seems to have got this idea that it can sell its shares at the time of its choosing through the ETF mechanism. But, the basic issue is that PSUs are not an attractive investment. Many of the funds based on this theme are doing poorly,” Kumar said.  In the original RFP floated last month, DoD called for “Sebi (Securities and Exchange Board of India)-registered mutual funds / asset management companies (AMCs)” with at least five years experience of fund management, and average equity / ETF assets under management “of not less than Rs 2,500 crore in India”.  

DoD also wanted the fund manager selected to provide “inputs on the various options suggested for structuring the PSU basket including but not limited to the terms of composition of stocks, weightages, and methodology followed, etc. The government also wanted the manager to leave no stone unturned in marketing the scheme to investors. “The selected AMC/ ETF provider shall incur marketing / advertising expenses to the extent of at least Rs 15 crore, under NFO (new fund offering) expenses,” it had said. The manager was also required to incur marketing expenses under NFO expenses, over and above this stipulated amount.

A combination of technical and financial parameters would determine the winner. In the financial parameter, funds are asked to specify the percentage of weekly assets they will charge as expense ratio. While this ratio will be applicable up to assets of Rs 5,000 crore, for the next Rs 10,000 crore AMCs will be able to charge 80 per cent of this ratio. For assets over Rs 15,000 crore, the fund can charge 60 per cent.