Ever since the Kelkar committee suggested there were about 50 PSUs whose stocks could be bundled into a mutual fund structure (Exchange Traded Fund, in market jargon), the government has been keen on the idea as one which can help achieve disinvestment targets while limiting the dilution of equity in the PSU—as in a mutual fund, the underlying PSU shares will remain with the asset management company running the ETF and those buying ETF paper will have no voting rights in the PSUs. Theoretically, the argument is also that ETFs will allow the ordinary shareholder to buy a diversified stake in PSUs.
The problem with the argument is that it assumes the investor populace wants to invest in a diversified portfolio of PSU stocks—the experience of mutual funds losing investors in droves while investing in even private sector stock should serve as a reality check. In the case of PSUs, the reasons for investor apathy are even greater. For one, government policy—as on forcing oil PSUs to lose thousands of crore through large subsidies—can drive down the value of the ETF even while it affects just a handful of stocks in them. Second, if the government is not going to get out of active management of the PSU, their stocks have a limited upside. Third, savvier investors want to focus on individual stocks—which is why, in recent divestments, state-owned players like LIC had to step in as buyers of the last resort. The larger point is that the offer-for-sale (OFS) route has worked very well for the government in the last fiscal—almost all divestment receipts in FY13 came by way of OFSs—so there’s no real reason to abandon it. Theoretically, if the government does indeed want a retail quota, it can offer this at a discount to the lowest offer in the OFS though the case for a discount for the retail investor doesn’t really exist.