The budget proposed tax benefits for exchange-traded funds (ETFs) investing in Central Public Sector Enterprises (CPSEs) in line with the ELSS (equity-linked savings scheme) category, giving investors in these schemes the benefit of tax deduction on investment up to ₹1.5 lakh per annum under Section 80C of the Income-tax Act. Currently, there are two such ETFs—CPSE ETF and Bharat 22 ETF—in the market that are available for investors and more will possibly be launched during the financial year. The move is aimed at ensuring retail investor participation in the government’s disinvestment program, and is likely to increase competition in an already over-crowded Section 80C basket.
“As ELSS units come with a lock-in period of three years, ETF units may also be subject to the same lock-in if they are on par,” said Gautam Nayak, a chartered accountant. “However the proposal to bring CPSE ETFs in the ELSS category is not present in the Finance Bill or Memorandum. It may be done by amending the ELSS category to cover such ETFs,” he added. “Instead, the Finance Bill proposes to reduce the rate of short-term capital gains tax (STCG) on fund of funds (FoF) to 15% (if they invest at least 90% of their assets in equity funds which in turn invest 90% of their assets in equities),” Nayak said. This will apply to FoFs investing in CPSE ETFs also such as the ICICI Prudential Bharat 22 FoF, which was launched in June 2018.
CPSE ETF was launched in 2014 and has given a 7.51% return since its launch. The ETF consists of 11 public sector enterprises and is managed by Reliance Nippon Life Asset Management Co. The benefit may also extend to CPSE debt ETFs that are to be launched soon. “My understanding is that the tax benefit proposed for CPSE ETFs will include both debt and equity,” said Radhika Gupta, chief executive officer, Edelweiss Asset Management Ltd.
Bharat 22, managed by ICICI Prudential Asset Management Co., consists of three private sector enterprises and 19 public sector enterprises. However, the private sector has a significant 38% weight in it.
“This is a positive move. It clearly shows that the government is serious about disinvestment and promoting an equity culture,” said Sundeep Sikka, chief executive officer, Reliance Nippon Life Asset Management Co. “People who invest through this route are likely to have a three-year lock-in and hence will not be investing to just grab any discount that may be offered,” he added. However, the government move has also been viewed negatively by a lot of fund managers and investment advisers. “I have never recommended ETFs based on government ownership. The government has been a poor asset allocator and is not a great business manager,” said Suresh Sadgopan, founder, Ladder7 Financial Advisories.
Some financial advisers argue for a greater number of products to be included in Section 80C. “The inclusion of an additional product in the ELSS space is welcome, but why restrict it to disinvestment of government companies,” said Gaurav Rastogi, co-founder, Kuvera, a mutual fund investment platform.
“ETF investment is cumbersome,” said Aashish Somaiyya, chief executive offiver, Motilal Oswal Asset Management Co. Ltd. “It needs a demat and trading account and so it attracts only stock market investors. Data clearly shows that the corpus dwindles after the discount has been skimmed. If genuine intent is to increase equity participation, the format should be open-ended funds,” he added.
The equity markets too reacted negatively to finance minister Nirmala Sitharaman’s suggestion to increase public shareholding in listed companies to 35% from the current 25%. The possibility of a situation similar to when Sebi implemented the 25% public shareholding norm during 2010-13, when listed subsidiaries of MNCs chose to delist, weighed on market sentiments. If Sebi does take note of the nudge and goes through with the increased public shareholding norms, then investors can expect a slew of offers for sale as companies comply with the norms.
S. Krishnakumar, chief investment officer, Sundaram Asset Management Co. Ltd, pointed out to the dampening impact of an increase in supply of shares on prices . “A ₹2- 3 trillion supply of stocks may depress prices but it may happen over a period of time and, impact may be lower,” he said. “Indices such as the MSCI Emerging Market Index are based on free-float market capitalization. If the free float of stocks goes up, then India’s weight in the index too will go up, leading to greater foreign capital flowing into Indian stocks,” said Pankaj Tibrewal, senior vice-president of Kotak Mahindra Asset Management Co.
Debt markets cheered the budget with 10-year government securities seeing a 10 bps fall in yield. “Containing the fiscal deficit to 3.3% of the GDP was the big positive for the debt markets,” said Mahendra Jajoo, head, fixed income, Mirae Asset Management Ltd. The announcement that the government will look to external markets to raise a part of its gross borrowing program was also well-received. “I expect 10-year yields to settle lower at 6-6.25%,” said Jajoo. “But the decline will not be secular and investors must expect some volatility,” he added.
Two profiles of debt fund investors are likely to benefit the most from the conditions. First, investors with around a three-year investment horizon and medium risk appetite who don’t have a high-return expectation will benefit from investing in the short-duration debt fund category. Second, investors, who want to participate in the downward movement of interest rates, have a longer horizon and are willing to absorb some volatility, will benefit from the appreciation in bond values as yields trend down over time. Long-duration bond funds will give the best shot at the opportunity. The finance minister also reiterated the importance of retail participation in debt markets. To encourage retail participation in treasury bills and G-secs, the finance minister proposed strengthening institutional infrastructure.
If the annual dose of personal monetary stimulus in the form of income-tax breaks did not come through in this budget, it left investors with a road map of what can happen. Household savings rate, which have been low, may not get an immediate reason to revive. But there are clues to what may be possible in the future and that gives hope for better times to come.