The Cabinet on December 4 approved the launch of Bharat Bond Exchange Traded Fund (ETF), the first corporate bond, to deepen the bond market and facilitate retail participation.
Finance Minister Nirmala Sitharaman, in a press conference, announced that the Cabinet had given the go-ahead to an umbrella bond exchange-traded fund.
Bharat Bond ETF will have a definite maturity period, just like a closed-end mutual fund. The ETF units will be listed on stock exchanges.
The Bharat Bond ETF will provide additional money for Central Public Sector Undertakings (CPSUs), Central Public Sector Undertakings (CPSEs) and other government organisations.
Features of ETF
-A basket of bonds issued by CPSEs, CPSUs, Central Public Financial Institutions (CPFIs), or bonds of any government organisation
-Will be traded on exchange
-Small unit size of Rs 1,000
-Transparent NAV (periodic live NAV during the day)
-Transparent portfolio (daily disclosure on the website)
-Low cost (0.0005%) Bharat Bond ETF structure
-Each ETF to have a fixed maturity date
-The ETF will track the underlying index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index
-Will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other government organisation that matures on or before the ETF’s maturity date
-To begin with, it will have two maturity series— three and 10 years
Methodology
-The index will be constructed by the National Stock Exchange
-Different indices tracking specific maturity years—three and 10 years
Benefits of Bharat Bond ETF
-Will provide safety (underlying bonds are issued by CPSEs and other government-owned entities), liquidity (tradability on the exchange) and predictable tax-efficient returns (target maturity structure)
-Will be available to retail players who can invest in bonds with smaller amount--as low as Rs 1,000—thereby providing them an easy and low-cost access to bond markets
-Will increase the participation of retail investors, who until now didn’t participate in bond markets due to liquidity and accessibility constraints
-Tax-efficient when compared to bonds, as coupons from the bonds are taxed at marginal rates. Bond ETFs are taxed with the benefit of indexation, which significantly reduces the tax on capital gains for the investor
Bharat ETF benefits for CPSEs
-It will offer CPSEs, CPSUs, CPFIs and other government organisations an additional source of meeting their borrowing requirements apart from the bank financing
-Will expand their investor base through retail and HNI participation, which can increase the demand for their bonds. With an increase in demand, these issuers will may be able to borrow at reduced costs, bringing down their cost of borrowing over a period of time
-Trading on the exchange will help in better price discovery of the underlying bonds.
-Since a broad debt calendar to assess the borrowing needs of the CPSEs will be prepared and approved each year, it will inculcate borrowing discipline in the CPSEs, at least to the extent of this investment.
Impact on bond markets
-Target Maturity Bond ETF is expected to create a yield curve and a ladder of bond ETFs with different maturities across calendar years.
-The ETF is expected to create a new eco-system —market makers, index providers and awareness among investors—for launching new bond ETFs in India.
-This is expected to eventually increase the size of bond ETFs in India, leading to achieving key objectives at a larger scale —deepening bond markets, enhancing retail participation and reducing borrowing costs
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