Exclusive: Finmin plans Bharat Bond ETF tranche in Q3

The Bharat Bond ETF, which was launched in 2019, has seen five tranches so far.

The Finance Ministry is planning to issue a tranche of Bharat Bond ETF (exchange-traded fund) in December comprising central public sector enterprises (CPSEs), likely including the National Thermal Power Corporation (NTPC), the National Highways Authority of India (NHAI), the Power Finance Corporation (PFC), and the Power Grid Corporation of India Limited (Power Grid), a government official said.

However, the issue size this year may be smaller as there is less incentive for investors since the LTCG (long-term capital gains) indexation benefit for debt investments has been scrapped in the 2023 finance bill, he said. Bharat Bond is a tradable debt investment comprising CPSEs.

“Another tranche of Bharat Bond ETF will come likely in Q3, maybe in December this year. There is continuous demand from 4-5 CPSEs. We usually see demand from PFC for Rs 1,000-1,500 crore, from the National Bank For Agriculture And Rural Development (NABARD), from HUDCO (Housing and Urban Development Corporation), NTPC (for Rs 500-750 crore), NHAI, and Power Grid for Rs 500-1,000 crore. NHAI may raise the maximum permitted limit of 15 percent of the issue size,” the official told Moneycontrol.

A CPSE can raise a maximum of 15 percent of the exchange traded fund (ETF) size. The size of this tranche is unlikely to be more than Rs 3,000 crore due to the withdrawal of the LTCG benefit.

“This year, not much demand is expected in the ETF because of the withdrawal of the LTCG benefit on debt mutual funds and corporate bonds. There is not much incentive for bond investors. I do not expect more than a Rs 3,000-crore issue,” he said.

Earlier, the income from bonds could avail of the indexation benefit, which reduced the tax outgo. But post the amendment to the finance bill in 2023, now investors have to pay higher taxes on their income from debt investments.

The base amount of the ETF is likely to be Rs 1,000 crore, with an unlimited greenshoe option. The issue is likely to have multi-tenor bonds at 10 years and 12 years, he said.

“The Department of Investment and Public Asset Management (DIPAM), through Edelweiss Asset Management Company (AMC), will collect information from CPSEs on their requirements. The AMC service charges are paid from the scheme itself. Once the requirement of the CPSEs is finalised, the investor demand will be assessed,” the official added.

The Bharat Bond ETF, which was launched in 2019, has seen five tranches so far. Thanks to the ETF, even low-rated CPSEs get to avail of a lower interest rate. Had they gone to the market individually, they would’ve had to pay more.

“The CPSEs get around 4-5 basis points (bps) lower interest rate through the ETF than they would have had they gone to the market individually. The ETF is an alternative way to raise funds for CPSEs. The interest rate in the ETF is market driven. It is likely to be 7.5 percent, i.e., 0.5 percent more than government securities (G-Secs),” the  official added.

Also, when PSUs directly raise funds through bonds, it puts pressure on investor demand. The ETF helps avoid crowding out investment demand.

DIPAM facilitates the raising of funds for CPSEs and helps deepen the bond market as small retailers can buy a unit of the bond.

Since this is a debt instrument, the Bharat Bond ETF does not add to the disinvestment target of the government, which is at Rs 51,000 crore this year.

Meanwhile, the equity ETFs, including the Bharat 22 and CPSE, have been put on the backburner.

Moneycontrol has reached out to the Finance Ministry, PFC, NABARD, HUDCO, NTPC, NHAI, and Power Grid for comments. Their comments, if received, will be updated here.