In a move aimed at strengthening the corporate bond market and reducing the cost of borrowing, the Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, approved the creation of Bharat Bond Exchange Traded Fund (ETF) on December 4, 2019. This will be India's first corporate bond issued by state-run companies to be traded on bourses.
What will Bharat Bond ETF do?
A basket of bonds issued by public-sector companies or any government organisation, Bharat Bond ETF will be tradable on the stock exchange. Announcing the development, Finance Minister Nirmala Sitharaman said the unit size of these bonds, of Rs 1,000, will allow small investors to put their money with a fixed maturity date. As of now, the bond will have two maturity series — three years and 10 years, with each series having a separate index of the same maturity series.
The ETF will be launched every six months and the index will be constructed by the National Stock Exchange (NSE) as an independent index provider. Edelweiss Asset Management will launch the first tranche, but there will be other tranches for which other asset managers may be appointed. A K Capital Services is the sole advisor to the government for the debt ETF.
The move will help public-sector companies raise funds through debt instruments and further develop domestic capital markets, boosting alternative sources of funding for firms, even as a series of corporate defaults keep banks and shadow lenders wary. This will also increase the participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.
Stating that the Bharat Bond ETF would be the first corporate bond ETF in the country, the finance minister said: "With the creation and launch of umbrella ETF, we hope to diversify the investor base. It will provide safety, liquidity (tradability on exchange) and predictable tax-efficient returns (target maturity structure) to the investors."
What are ETFs?
Over the years, ETFs have become a popular investment vehicle for investors, allowing them to invest in a diverse collection of assets. According to the government estimates the Employees Provident Fund (EPFO) has invested about Rs 87,000 crore in ETFs.