Cabinet gives green signal to launch of exchange traded fund for bonds

05 Dec 2019 Evaluate

In order to create an additional source of funding for Central Public Sector Enterprises (CPSEs) and state-owned financial institutions, the Union Cabinet has given green signal to launch of exchange traded fund (ETF) for bonds, after exchange traded fund for equities. The New Fund Offer (NFO) of this ETF is expected to be launched during December itself. Bharat Bond ETF would be the first corporate bond ETF in the country.

Finance Minister Nirmala Sitharaman has said that with the creation and launch of umbrella ETF the government hopes to diversify investor base. She also said that it will help deepen bond market as was announced in the Budget. She said ETF will be a basket of bonds issued by state firms or any government organisation, and will be tradable on exchange, and added that the unit size will be of Rs 1,000, allowing small investors to invest. Each ETF will have fixed maturity date and will track underlying index on risk replication basis, she said, adding that for now it will have two maturity series -- 3 and 10 years -- with a low cost of 0.0005 per cent.

Sitharaman said 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 smaller amount, as low as Rs 1,000, thereby providing easy and low-cost access to bond markets. This will increase participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints. Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor.

With the increase in demand for their bonds, she said the issuers may be able to borrow at reduced cost, thereby reducing their cost of borrowing over a period of time. She added that 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 CPSEs at least to the extent of this investment. She emphasised that 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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