The CPSE Exchange Traded Fund, which works like a mutual fund, is made up of scrips of 10 CPSEs that are listed on stock exchanges and traded like shares. Central Public Sector Enterprises (CPSEs) are businesses in which the Central Government or other CPSEs own 51 per cent or more of the stock. CPSE ETFs is a significant topic in the UPSC IAS exam's Indian Economy Syllabus.

Exchange-Traded Funds (ETF)

• ETFs (Exchange Traded Funds) are mutual funds that are listed on stock exchanges and traded like stocks.
• Institutional investors build index ETFs by exchanging shares in an index basket for fund units.
• ETFs are typically passive funds in which the fund manager does not pick stocks for you.
• Instead, the ETF merely replicates an index and tries to replicate its performance as closely as possible.
• During market hours, one can purchase and sell units in an ETF at the current market price in real-time.

CPSE ETF

• A CPSE ETF is a collection of government-owned businesses from which the government seeks to sell a share.
• ONGC, Coal India, IOC, GAIL (India), Oil India, PFC, Bharat Electronics, REC, Engineers India, and Container Corporation of India make up the CPSE ETF.
• As a result, the general public, societies, corporations, and wealthy investors are all welcome to own shares in those organisations.
• The Nifty CPSE Index includes this ETF.
• By purchasing a single unit of the ETF, the buyer will receive a portion of each of the underlying public sector stocks.
• The CPSE ETF was available at a 5% discount to current market pricing during the sale.
• If that window was missed, the ETF is listed on the stock exchanges and one can buy or sell units in the secondary market.
• Goldman Sachs MF handled the CPSE ETF until it was bought by Reliance MF in October 2015.
• In January 2017, the government raised Rs 6,000 crore from the second tranche of the CPSE ETF, and Rs 3,000 crore from the first tranche in March 2014.

Benefits of CPSE Exchange Traded Funds (ETFs)

• ETFs offer an ideal way to invest directly in the Central Government-owned Navratna and Maharatna PSUs.
• The government's ongoing efforts to improve efficiency provide more guarantee of a solid 'Return-on-Investment.'
• CPSE Stocks have been market leaders despite occasional swings, and investing in a basket of CPSE stocks is less risky than other shares.
• In comparison to other financial vehicles, CPSE ETFs have done well since their inception.
• The Government of India offers discounts on the market price of the underlying stocks to investors considering ETFs in their portfolios.
• Budget announcements have created an opportunity for CPSE ETF investors to take advantage of significant tax savings.
• Furthermore, the CPSE ETF investment has the lowest risk of any entry or exit burden.
• Instead of buying individual PSU stocks, CPSE ETF is a way to target CPSEs collectively.

Importance of CPSE ETF

• Investor response is sometimes contingent on market conditions when the Centre floats its disinvestment offerings one at a time.
• When the Centre disinvests through the CPSE ETF method, it can do so in bulk, affecting a large number of PSUs.
• With a high-decibel marketing effort, the offer can be timed to coincide with favourable market conditions.
• A strong disinvestment mop-up will result in a decreased tax burden for taxpayers.

Risks Associated With ETFs

There are some inherent risks related to that of ETF investment:

• Because India imports over 85% of its oil from outside, the significant volatility of the Oil and Gas market has a direct impact on the underlying funds of the CPSE ETFs' Return on Investment (ROI) capabilities.
• All of the companies in the CPSE ETF are public sector undertakings. This limits exposure.
• Any action taken by the government on the privatisation front may have an impact on the assets' overall return capabilities.
• Because this administration is committed to monetising non-performing assets, relying entirely on government-backed confidence could be problematic.
• Past results are no guarantee of future results.
• CPSE ETFs are vehicles for the government to disinvest. Their large concentration of PSUs may be a disincentive to retail investors.
• Government participation in business and pricing choices is a constant for PSUs.
• The CPSE basket is largely reliant on the commodity and economic cycle, with roughly 74% of its portfolio committed to energy equities which has a high volatility rate.
• An investment might be profitable for both the seller and the buyer. As a result, if the government wins, you will lose.

Conclusion

The Indian government's long-standing workhorses, the Central State Sector Enterprises (CPSEs), have been privatised in order to free up funding for developmental goals and to transfer non-performing public firms to the private sector. This tendency has generated concerns about the viability of investing in a CPSE ETF.

FAQs

MCQs

1. What is the primary purpose of CPSE ETF?

A) To offer corporate bonds from public sector enterprises
B) To provide investors exposure to the government-backed public sector enterprises
C) To exclusively invest in private sector companies
D) To fund infrastructure development projects

2. How does the government utilize CPSE ETF?

A) To raise funds for the private sector
B) To raise capital through disinvestment in public sector enterprises
C) To raise funds for public welfare schemes
D) To support environmental initiatives

3. What type of investors can participate in CPSE ETF?

A) Only institutional investors
B) Only high-net-worth individuals
C) Both retail and institutional investors
D) Only foreign investors

4. What is a major risk associated with CPSE ETF investments?

A) Inflation risk
B) Sectoral risk due to exposure to public sector enterprises
C) No risk, as the government backs it
D) Limited government intervention

5. What is one of the primary advantages of CPSE ETF for retail investors?

A) High tax benefits
B) Diversification into private sector companies
C) Exposure to a basket of government-backed public sector enterprises
D) Guaranteed returns from the government

GS Mains Questions and Model Answers

Q1: Discuss the role of CPSE ETFs in India’s disinvestment strategy and their impact on public sector enterprises.

Answer: CPSE ETFs play a crucial role in India’s disinvestment strategy by allowing the government to monetize its stake in public sector enterprises (PSEs) without fully privatizing them. This approach helps in raising funds for the government’s fiscal requirements while maintaining public ownership in strategic sectors. The disinvestment through CPSE ETFs also brings transparency, liquidity, and market-based pricing to the process. It helps in improving the governance and performance of PSEs by exposing them to market forces and encouraging operational efficiency. Additionally, the public participation in these ETFs helps in broadening the ownership base, which is crucial for national economic development.

Q2: Evaluate the impact of CPSE ETF on retail investors in India.

Answer: The introduction of CPSE ETF has opened up investment opportunities for retail investors in India, allowing them to invest in a basket of publicly listed government enterprises. This form of indirect investment in public sector stocks provides several benefits, including diversification, lower costs, and exposure to government-backed entities. The CPSE ETF also offers a relatively safe investment option for conservative investors, given the backing of the Indian government. However, retail investors must also be aware of sector-specific risks and market volatility that can impact the returns from the ETF.

Q3: How does the CPSE ETF contribute to the development of the Indian capital market?

Answer: CPSE ETF contributes to the development of the Indian capital market by enhancing liquidity and market participation. It offers a simple and cost-effective investment vehicle for institutional and retail investors to gain exposure to public sector enterprises. The frequent launches and public offerings of CPSE ETFs help deepen the market by attracting new investors and diversifying the investment base. The active participation of institutional investors also enhances market efficiency, and the continuous disinvestment process helps improve the governance of public sector enterprises by encouraging performance-based evaluation in the stock market.

Previous Year Questions on CPSE ETF

1. UPSC CSE Prelims 2020:

Question: What is the main objective of the CPSE ETF?

A) To provide tax-free investment options
B) To raise capital for the government through disinvestment
C) To privatize public sector enterprises
D) To provide loans to public sector enterprises

Answer: (B)

Explanation: The main objective of CPSE ETF is to raise capital for the government by selling its stakes in public sector enterprises through a diversified exchange-traded fund.

2. UPSC CSE Mains 2019 (GS Paper 3):

Question: Explain the importance of CPSE ETFs in India’s disinvestment process and their economic implications.

Answer: CPSE ETFs are a significant part of India’s disinvestment strategy. By offering shares in public sector enterprises through ETFs, the government can raise capital efficiently while promoting market-based valuation. This process helps improve transparency, enhances investor participation, and supports fiscal consolidation. Economically, CPSE ETFs contribute to the development of the capital market and help ensure that public sector enterprises remain competitive while benefiting from market discipline. The increased liquidity and broader ownership can lead to better governance practices in these enterprises.