India is launching an ETF that will invest in state-run businesses. The move comes as part of the government’s efforts to raise cash and close the country’s fiscal gap.
The ETF is well-timed: Investor interest in India is piqued. After all, in 2012, the EGShares India Consumer ETF (NYSEArca: INCO) rose nearly 52 percent to close out the year as one of the top-performing ETFs for 2012.
Details on the Indian government’s planned ETF are still emerging: We know the portfolio is likely to hold 15 to 20 profit-making companies, according to a senior finance ministry official quoted by the Wall Street Journal.
But it’s not yet clear which companies/sectors would be included and whether the government would be relinquishing majority-shareholder status.
As a point of reference, let’s use the MSCI India Investable Markets Index as a proxy to see a breakdown of the investable Indian market below:
The Indian government owns a broad portfolio of companies whose operations range from health care to mining.
What is clear, according to the official quoted in the Journal, is that the fund will purchase its shares directly from the government.
The plan is borne from a need for the Indian government to close its fiscal gap, and a large part of closing that budget is selling stakes in state-run businesses.
The problem has been drumming up sufficient investor interest: According to the Journal, the Indian government has raised less than $1.3 billion of the $5.5 billion total it hopes to raise.
Why an ETF?
If the government could sell its assets directly to large investors for a “good” price, it probably would.
The government is choosing the more-effort-intensive ETF route because it believes it will receive better prices selling its assets to a fund rather than directly to large investors.
But if the big boys don’t want to play with their “smart money,” do you?
Although the government has faced what appears to be limited interest in its assets, an ETF may prove more fruitful.
India’s promising growth story is widely circulated globally and an ETF wrapper gives individual investors the opportunity to participate in a booming market.
The Sensex Index, the most popular gauge of the Indian equity market, finished 2012 up over 25 percent.
I’ll stress the point again: The government wasn’t able to sell its assets to the world’s wealthiest and most informed investors, so now it’s turning to ETFs to test the market with retail investors. Your move.
The ETF wrapper is also appealing because its broader holding base will likely enhance secondary market liquidity for portfolio securities in comparison to selling large illiquid stakes to a few key shareholders.
The planned ETF will provide another avenue for investing in the promising re-emerging Indian market. India is known for its high levels of business as well as political corruption, which is bad for everyone . . . except the corrupt.
The ETF could be a prime opportunity to invest in the Indian growth story, with a quasi-hedge against corruption. If you believe in India but are hindered by the level of corruption, perhaps owning the same companies as the government could turn the tables in your favor.
No official plans for the India ETF have been released, but the fund would likely trade on the Bombay Stock Exchange, or one of India’s other exchanges.
Retail investors looking for exposure to India may be better off sticking with an Indian ETF that’s listed and traded on the New York Stock Exchange, the world’s most liquid market, or at least within the U.S.
Additionally, American investors may enjoy the extra layer of “protection” the Securities and Exchange Commission provides. Ultimately, time will tell if the ETF proves popular with investors and helps India close its fiscal gap.
At the time this article was written, the author had no positions in the securities mentioned. Contact Spencer Bogart at firstname.lastname@example.org.
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