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By selling stakes through the exchange- traded fund ( ETF) route, the central government hopes to overcome a major irritant it faces each time ahead of disinvestment —the hammering of stocks by short- sellers.

The government aims to raise ₹ 3,000 crore from the so called central public sector enterprises ( CPSE) ETF, to be open for subscription between Tuesday and Saturday. The CPSE ETF will be a basket of 10 stocks, in which the government will be selling a tiny portion of its shareholding.

Though the Centre is offering afive per cent upfront discount to all investors who will apply in the New Fund Offer (NFO), it is hoping short sellers or arbitrageurs will be kept at bay, given the complexity of the transaction.

On most of the previous occasions, savvy investors shortsold stocks of divestmentbound companies and later covered their positions by applying at a lower price during the public issues, making a cool return. This trend has been witnessed in most offer for sale (OFS) or follow- on public offerings (FPO) by the government, as the public issue pricing, typically, is kept lower than the market price to attract investors.

"We are hoping by divesting through the CPSE ETF route, there won't be any shorting in the secondary market, as the arbitrage opportunity is not very straight- forward," said a senior official with the department of disinvestment ( DoD).

Brokers said a five per cent arbitrage was there for the taking, on paper;, in practice, it would be tricky. "Unlike any normal disinvestment, where the government offloads its stake in a signal company, with the ETF it will be ' basket selling' in 10 stocks. Therefore, a short- seller will have to sell short all the 10 stocks together in the secondary market and later hope he can cover the position by applying during the NFO of the CPSE ETF," said an official with a domestic brokerage.

A major impediment, experts said, would be no physical delivery of shares. " When you apply in an OFS or FPO, you get shares. Here, you will get ETF units and not shares of individual companies, which makes it complex," said a broker.

Also, the purchase price for the ETF will be decided on a volume- weighted average price (VWAP) basis. The average price of the daily VWAP for the days when the NFO will be open will be the one at which the government will sell its stake in the 10 companies to the ETF.

In the CPSE ETF, the government will be divesting the most in terms of value in Oil and Natural Gas Corporation, about ₹ 800 crore, and the least in Engineers India, at a little less than ₹ 40 crore.

The ETF is likely to be the final disinvestment by the government in the current financial year. Its success will ensure the government meets the year's revised disinvestment target of ₹ 16,000 crore.

The DoD official said the ETF, to be listed on the exchanges, can be used for future divestments in companies that are a part of the index.

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