Bharat Bond ETF will help India become financially more vibrant economy: FM Nirmala Sitharaman

Sitharaman said that this will help India become a lot more financially vibrant economy. Bharat Bond ETF will have a fixed maturity period like close-ended mutual funds and the units will be listed on stock exchanges. 

Bharat Bond ETF will help India become financially more vibrant economy: FM Nirmala Sitharaman

New Delhi: The Cabinet Committee on Economic Affairs (CCEA) on Wednesday (December 4) approved creation and launch of Bharat Bond Exchange Traded Fund (ETF) to create an additional source of funding for central public sector undertakings (CPSUs), central public sector enterprises (CPSEs), central public financial institutions (CPFIs) and other government organisations. Notably, the CCEA meeting was chaired by Prime Minister Narendra Modi.

Addressing a press conference, Finance Minister Nirmala Sitharaman said, "Bharat Bond ETF will be the first corporate bond ETF in the country," adding that the government is trying to deepen the corporate bond market and create alternatives for raising funds. 

Sitharaman said that this will help India become a lot more financially vibrant economy. Bharat Bond ETF will have a fixed maturity period like close-ended mutual funds and the units will be listed on stock exchanges. The unit value will be capped at Rs 1,000. The scheme will offer two options, one maturing in three years and the other in 10 years.

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Earlier, the government had come up with equity ETFs twice -- the first one in 2014 and the second in 2017. 

"Both the ETFs have had a good success rate," said Sitharaman, adding "Every retail purchase of the bond will give the satisfaction that a person is participating in the development of the economy. Besides, while retail investors were earlier making meagerly returns on fixed deposits and savings, they can now invest in ETFs which will be traded openly and will give a rate of interest that will be fixed depending on the flow." 

Key features of Bharat Bond ETF are:

ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds (Initially, all AAA-rated bonds)

-Tradable on exchange
-Small unit size Rs 1,000    
-Transparent NAV (Periodic live NAV during the day)
-Transparent Portfolio (Daily disclosure on the website)
-Low cost (0.0005%)

1. 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 mature 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.

2. Index Methodology:

-Index will be constructed by an independent index provider – National Sock Exchange
-Different indices tracking specific maturity years - 3 and 10 years

3. Benefits of Bharat Bond ETF to investors:

-Bond ETF will provide safety (underlying bonds are issued by CPSEs and other Government-owned entities), liquidity (tradability on exchange) and predictable tax-efficient returns (target maturity structure).
-It will also provide access to retail investors to invest in bonds with a smaller amount (as low as Rs. 1,000) thereby providing easy and low-cost access to bond markets.
-This will increase the participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.
-Tax efficiency 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 investors.

4. Bharat Bond ETF Benefits for CPSEs:

-Bond ETF would offer CPSEs, CPSUs, CPFIs and other Government organizations an additional source of meeting their borrowing requirements apart from bank financing.
-It will expand their investor base through retail and HNI participation which can increase demand for their bonds. With an increase in demand for their bonds, these issuers may be able to borrow at reduced cost thereby reducing their 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.

5. Developmental 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.
-ETF is expected to create new eco-system - Market Makers, index providers, and awareness amongst 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.

Notably, the proposal was first announced by late Arun Jaitley in his Budget 2018-19 speech. Bharat Bond ETF is expected to create a new ecosystem of market makers and index providers besides creating awareness among investors for launching new bond ETFs in India, according to an official statement.