Jul 5, 2014

Open Letter VI to Shri Narendra Modi: A Novel Sovereign Fund, the India super ETF

Shri Narendra Ji Modi
Prime Minister

Respected Modi Ji, 

India is a sovereign entity. We have wealth. Why should we not have an India Sovereign Fund? Why should we restrict our imagination only to how the West does some things? 

In answer to these two simple questions, here is a lucid solution:

1) Transfer each and every single share in every PSU, irrespective of whether any specific PSU is loss-making, profit-making, strategic or non strategic into the India Sovereign Exchange Traded Fund. 

2) An ETF is an open-ended fund, by definition. Liquidity to the units of such a fund are provided by market-makers. The more liquid the units of this fund will become in time, the more liquid an asset the Government of India will be sitting upon. By common-sense, the more liquid an asset is the more useful, portable and thus valuable it becomes. The Balance Sheet of the Government of India will be cleaner, more liquid and thus more effective in meeting many endless goals. 

3) If the Government of India will not participate regularly in buying and selling units of this Super ETF, then too, all kinds of investors and traders, wheather local or global, whether short term horizon seekers or long term value merchants, will participate. This creates an enormous investible basket and a new venue in financial markets for competitive capital allocation. Indirectly, the Government will have a liquid large pile of near cash with such a simple manouver. No need for going through intensely political, slow and often sensitive divestments that have sapped the momentum out of the reform process time and again. In a single stroke, display the readiness to disown the entire public sector. The conversion of all the holdings in the name of the President of India into an ETF is not divestment or disowning the PSU, but a preparation to do that in any proportion across the board in a diversified manner, continuously over time. A signal from the sovereign is good as the actions to come! 

4) Whenever markets are in euphoric extremes, the Government of India can readily encash its liquid holdings of the units of this India Super Fund or the India Sovereign ETF. Whenever markets are drowning, if appropriate and timely encashment cycles have been utilized in the prior periods, the various vehicles of the Government of India can buy into "cheap" prices of these units. Over time, a net net divestment cycle will be smooth, regular, without any innuendos and conundrums. 

5) Even if some PSUs may still not be listed, a professionally managed super-fund as this can cause listings, over time. 

6) Tax arbitrage be made available to those investors in the super-fund who would on liquidating the units of the fund collect shares of the underlying holdings in proportion instead of cash and continue to hold such underlying shares through the cumulative holding period of 1 year eligible for long term gains. The benefits of hedging on these individual shares be allowed too. Benefit of such a structure is that without increasing the floating stock of the highly valuable PSUs, contestable price discovery will continue. This will likely ensure a higher Valuation Band for the PSU companies over time, than would be if such a structuring is not offered. 

7) The decisions regarding when the Government of India liquidates any holdings of units in this Super Fund and when does the Government of India buys any units of the Super Fund be left to in the independent discretion of the Reserve Bank of India. Central Bankers that trade currencies world over are above any suspicions or allegations of Insider Trading. This should be good enough a reason for all to trust the Central Banker of our country in trading the holdings in PSUs purely based on its own macro assessments and its own estimates of the cash-flow needs on the Balance sheet of the nation. 

8) Let us seriously examine the possibility of deleveraging the Balance Sheet of our Nation with this move. With an initial listing of the ETF, on the average six months' price of the ETF holdings of the Government of India a transfer should be made to the Reserve Bank of India and an equal value of the outstanding bonds of the Government of India should be retired out. A far healthier balance sheet of India will likely only improve our rating, than otherwise. 

9) If such a large reduction in the Government debt comes by with this move, there will be a unique situation. Prices of Government Bonds would have moved up without throwing in any additional cash into the markets. Can interest rates therefore not come down and the risk of inflation in essentials will still not go up! If at all, this mechanism is exporting the inflation risk from consumables to asset markets! 

I urge, you delegate this simple thought process to each key stake-holder in Governance, for a close inspection. 

Sincerely yours, 
With respect & love,

Sushil Kedia


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