New Delhi: The Modi Government on Wednesday cleared launch of the Bharat Bond Exchange Traded Fund (ETF) to deepen the bond market, welcoming retail investors to participate in funding of the Central Public Sector Undertakings (CPSUs), Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other Government organizations.
Bharat Bond ETF would be the first corporate Bond ETF in the country. "Umbrella bond ETF will diversify investor base as we promised in the Budget, for creating an opportunity for the general public to participate in the bond market," Finance Minister Nirmala Sitharaman told a Press conference after the cabinet committee on economic affairs cleared it.
Investors of the Bharat Bond ETF are assured safety since they are issued by CPSEs and other Government owned entities, liquidity as they are tradable on exchanges and predictable tax efficient returns as they have inbuilt target maturity structure.
It will also provide access to retail investors to invest in bonds with smaller amount, as low as Rs. 1,000, thereby providing easy and low-cost access to bond markets. It will increase participation of the retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.
The Bharat Bonds will have the tax efficiency compared to other 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 investor.
The central organisations will gain from the Bond ETF as an additional source of meeting their borrowing requirements apart from bank financing. These bonds will also expand their investor base through retail and HNI participation which can increase demand for their bonds. With increase in demand for their bonds, these issuers may be able to borrow at reduced cost, thereby reducing the cost of borrowing over a period of time.
Further, Bond ETF 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 would be prepared and approved each year, it would inculcate borrowing discipline in the CPSEs at least to the extent of this investment.
The Bond ETF will be listed on exchanges and investors can avail liquidity through Market Makers who must have inventory of ETF units worth Rs 1 crore.
In the Union Budget for 2018-19, the government had announced plans for debt ETFs of public sector bonds after the success of equity ETFs like CPSE ETF and Bharat-22.
Equity ETFs have gained the most from this popularity, with more than Rs 1.38 lakh crore of their assets being managed through these ETFs.
Gold ETFs manage around Rs 5,800 crore. A debt ETF is a collection of such corporate debt paper, where the maturity duration of these bonds are close to each other.
As the series of bonds mature, other debt papers of a same or similar credit quality and maturity are placed in the basket. So a debt ETF, like equity ETF, becomes a perennial investment option.
Debt ETFs in developed markets are held in large numbers by pension funds, endowments and retirement corpuses.
A statement issued by the Finance Ministry says ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization. Bonds. Highlights of the Bhart Bond ETF are:
• Tradable on exchange
• Small unit size Rs 1,000
• Transparent NAV (Periodic live NAV during the day)
• Transparent Portfolio (Daily disclosure on website)
• Low cost (0.0005%)
Bharat Bond ETF Structure:
• Each ETF will 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 organizations that matures on or before the maturity date of the ETF
• As of now, it will have 2 maturity series - 3 and 10 years. Each series will have a separate index of the same maturity series.
As regards the index methodology, it will be constructed by an independent index provider – National Stock Exchange and different indices tracking specific maturity years - 3 and 10 years.