GSAM launches ETF ‘game-changer’ in India

Goldman Sachs Asset Management will today launch a landmark exchange-traded fund on India’s two main bourses that it says could be a game-changer in driving domestic mutual fund investment.

The firm's Mumbai-based unit, which bought Indian ETF firm Benchmark Mutual Fund in 2011, has raised almost $500 million for CPSE ETF, which is listing on the National Stock Exchange and Bombay Stock Exchange.

That ranks it as by far the largest equity ETF in the country and the largest domestic equity fund launch since Reliance Natural Resources Fund in 2008, notes GSAM. 

There were 24 equity ETFs in India prior to this launch, with a combined AUM of just $114 million million. So in one swoop GSAM will multiply the market more than four times.

CPSE ETF will also become the third largest equity offering in India’s secondary market this year and in the top 10 since the start of 2013, by Dealogic figures.

Goldman’s CPSE ETF comprises 10 stocks, all state-owned companies in the energy, utility and financial services industries that have been divested to varying degrees by the government. The largest constituent is ONGC Corporation at 26.7%, followed by Gail (India) at 18.5% and Coal India at 17.8%.

The government has faced criticism over its divestment programme of state-run firms, a process that has been going on since the early 1990s as India’s economy opened up.

Sanjiv Shah, chief executive of GSAM India, explains that it broached the idea of divestment via ETF with the government in March 2012.

“One of the thoughts we had was, ‘why don’t we go to the government and say there could be a nicer way of doing this [divestment], to have a basket of public sector stocks that it would be very difficult to short in one go?” he tells AsianInvestor.

“This is a good mechanism for the government to pool high-quality PSu company shares and not see their stock prices plummet due to overhang in individual company shares.”

Goldman was appointed asset manager for this project in May 2013, since when it has been working on the index fund and creating the basket of stocks.

Shah explains that GSAM has had experience of the divestment process via ETF, having advised the Hong Kong Monetary Authority on its disposal of blue-chip stocks it had bought during the Asian financial crisis via the HK Tracker Fund in 1999.

Goldman’s CPSE ETF was launched to anchor investors on March 18, attracting seven institutions – public- and private-sector insurers and banks. The fund was then opened for public investment on March 19 for listing today.

GSAM says the product was 1.5 times oversubscribed, having raised $730 million, meaning $230 million had to be refunded to investors, in accordance with the government mandate limit of $500 million.

But Shah notes that there is potential for the fund to grow, with the government having announced plans to divest $5 billion in state-owned firms over five years.

The ETF has a tap facility for the government to continue divestment from the 10 companies until its hits its minimum 51% holding in each.

Shah says it also has provisions for attracting long-term investors through loyalty units. “The mutual fund industry in India has been going through a slump," he notes. "I think this could be a game-changer to some extent, given that you [now] have lots of people starting to invest in the equity market through a mutual fund.

“As this ETF lists there will be pent-up demand. There have been so few opportunities for retail investors to buy into equity launches in India recently.”