New Delhi (NVI): The Cabinet today approved creation and launch of Bharat Bond Exchange Traded Fund (ETF), which will be the first corporate Bond ETF in the country.
This bond will 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, an official statement said.
The Bharat Bond ETF will be a basket of bonds issued by CPSE, CPSU, CPFI or any other Government organisation bonds (initially, all AAA rated bonds).
Each ETF will have a fixed maturity date. It will track the underlying Index on risk replication basis, such as matching credit quality and average maturity of the index.
Moreover, it will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other Government organisations that matures on or before the maturity date of the ETF. As of now, it will have two maturity series of three and 10 years. Each series will have a separate index of the same maturity series.
The index will be constructed by an independent index provider — National Sock Exchange.
The 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 also increase 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 investor.
With regards to ETF Benefits for CPSEs, it will offer CPSEs, CPSUs, CPFIs and other Government organisations 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 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.
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.
Target Maturity Bond ETF is expected to create a yield curve and a ladder of Bond ETFs with different maturities across calendar years.
It is expected to create new eco-system – Market Makers, index providers and awareness amongst investors – for launching new Bond ETFs in India, the statement added.