Bharat 22 ETF reopens for subscription on June 20th; should you invest?Bharat 22 ETF is an exchange-traded fund comprised of a set of 22 stocks. Most of the stocks in it are public sector undertaking (PSUs)-  19 out of 22 – and there are three private sector companies – L&T, ITC and Axis Bank. All its holdings are the outcome of the government’s desire to disinvest or reduce its stake in these companies. Bharat 22 was launched on November 17th, 2017 and has delivered a return of -6.43% since inception (as on 15/06/2018). Yes, you read that right, negative 6.43%.

The government retained about Rs 14,500 crore from the previous round of subscription after getting bids worth over Rs 31,000 crore. The fund’s assets under management (AUM) steadily dropped since then, losing about Rs 3,000 crore in December 2017 alone. The AUM now stands at Rs 5,459 crore, about a third of the original size.

The ETF will be open for subscription between 20th and 22nd June. Anchor investors (financial institutions) can apply on 19th July. Applicants are being offered a discount of 2.5%. You can also buy ETF units after it lists on the market. However, you will not be offered a discount if you buy it after listing. The government proposes to raise Rs 6,000 crore from this offering, effectively doubling the (much reduced) size of the ETF. It will also have the option of further retaining an over-subscription of another Rs 2,400 crore.

How to buy

You will need a demat and trading account to buy. If you don’t have these, you can buy ICICI Prudential Bharat 22 Fund-of-Funds (FoF) which will, in turn, buy the ETF. You can buy the FoF just like any other mutual fund. However, note that the FoF has not been launched yet. Draft papers for the FoF have been filed with SEBI.

How Bharat 22 came about

The ETF is an outcome of the government’s desire to sell minority stakes in its enterprises and raise capital for its needs. In terms of proportion, the public-private sector split in its holdings is roughly 60:40 because the three private sector companies have significant weights in its portfolio. The private sector companies are present in this drive due to an accident of history. The Unit Trust of India, a government-owned institution, was split into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India (SUUTI) after the failure of UTI’s flagship scheme US 64. These private sector stocks were transferred to SUUTI as part of this division and the government is now looking to sell them.  

What is an ETF?

An ETF or exchange-traded fund is a passive mutual fund which tracks an index and holds a basket of stocks in the same weights as the index. For instance, the Reliance ETF Nifty BeES ETF tracks the Nifty 50 index and has stocks in the same weightage as in the index. Bharat 22 tracks the S&P Bharat 22 index, which was custom created for it and contains the public-private mix discussed above.

An ETF is itself listed on the stock market and units of the ETF can be bought and sold on the stock market. In fact, this is the only practical way of buying an ETF after listing. In theory, you can buy ETF units from the fund house and sell them back to the fund house. However, this is usually allowed only for very large transactions.

RupeeIQ Take

The Bharat 22 ETF is not a result of any logical investment theme or strategy. It exists only because the government wants to disinvest its holdings in the portfolio companies. It is difficult to imagine why it will outperform an ETF tracking just the Sensex or Nifty 50 or even an average actively managed mutual fund. It has delivered a -6.43% return so far.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.