Edelweiss AMC can pay investors exiting Bharat Bond ETF in kind: CEO

In a Q&A, Radhika Gupta explains the finer points about investing in India's first debt ETF, which is likely to be launched next week

The Bharat Bond Exchange Traded Fund (ETF) is likely to be launched next week. In an interaction with Jash Kriplani, Radhika Gupta, chief executive officer of Edelweiss Asset Management Company (AMC), shares how it is looking to deal with potential liquidity-related and operational issues that can crop up while managing such a fund. Excerpts ...

How would a large investor exit from the Bharat Bond ETF?

A large investor would come directly to the AMC to extinguish the units. The AMC will either give cash or pay in kind to the redeeming investor. The AMC should be able to liquidate the units and give cash. However, the alternative is to pay in kind. Large institutional investors might actually prefer to keep these bonds on their books. Even today, the mutual fund industry deals with redemptions worth Rs 200-500 crore. So, dealing with these redemption requests would be manageable. These public sector bonds are one of the most liquid corporate bonds.  

What about when a large investor wants to buy. Would there be enough supply?

Regular issuances will be done by the secondary market. However, if there is a request for large investments, we will go back to the issuers to deal with this demand. One thing that needs to be pointed out is that when we launch the ETF, we will not be the only holders of these securities. The issuers have promised us that there will be more units of these securities in the market. So, these bonds will be trading in the market. We won't be the only holders of these bonds. Today, we are launching ETF with three-year and ten-year maturities. These will be launched every year. But, when three and ten-year become two and nine-year, we will conduct re-issuances in them once a year or at other suitable intervals.

Coupon payments need to be re-invested as per product structure. Would PSUs need to make a smaller tranche of fresh issuances for this?

The coupons will come in a staggered manner. It is not like there will be a large coupon payment in one batch. There is enough liquidity in the secondary market to take care of this. Also, one of the index criteria for the inclusion of these bonds is that they must have a certain amount of bonds outstanding in this segment to be eligible. One of the reasons to do that is to take care of these things. So that there are enough bonds out there, which will also be held by others. As part of this process, the government has also asked PSUs to keep re-issuing in that segment. So, we want to deepen these securities. Otherwise, the corporate bond market is very fragmented.

In case there is a downgrade or issuer ceases to be government-owned following disinvestment, what would be the impact on the ETF?

First, the bond would come out from the index. One thing to keep in mind is that the probability of default in AAA-rated PSU is quite unlikely. The possibility of a downgrade is also quite slim. In the event of a downgrade, say from AAA to AA-plus, it comes out of the index and gradually out of the ETF. The good news is that even at AA-plus, these PSU bonds would find plenty of buyers. So, it is not that it is overnight getting downgraded from AAA to B and then there is no liquidity. When it comes to government disinvestment, it is important to note that the Department of Investment and Public Asset Management -- which manages disinvestment -- is also the lead on this ETF. Also, the time between cabinet approval for disinvestment and actual disinvestment tends to be quite long. So, you have adequate time to deal with this.

In case of a downgrade, in how much time would the bond come out from the ETF?

We would want to do it as soon as possible, but also as efficiently as we can. It would come out of the index on re-balance. The way it would come out of the index is that if it is below-investment-grade it would come out in five days, otherwise on rebalance. And then from the ETF, as sensibly as possible.

How will the AMC bear the costs of managing the fund with expense ratio being quite marginal?

It is a passive fund. But obviously, a lot of work has gone into the production of Bharat Bond ETF in the last year. A lot of thinking has gone in bringing the first corporate bond ETF to market, which has entailed some cost. There is also a marketing cost that we are bearing in bringing this. Also, running the ETF would entail some operating costs. But, we genuinely see this as an investment. As Edelweiss group and Edelweiss AMC, we are committed to this business. We feel this a good way to build our fixed income franchise. We don't have a large fixed-income franchise today. We didn't want to do the vanilla fixed income passive product. We wanted to do something big and new.