Cabinet gives approval to Bharat Bond ETF, launch in early January

Bharat Bond ETF will be made of AAA-rated papers issued by govt-linked firms

The Union Cabinet on Wednesday approved the launch of India’s first bond exchange-traded fund (ETF) which can be bought and sold like any listed security on the bourses. The ETF — Bharat Bond ETF — will be made of AAA-rated papers issued by government-linked companies to start with, and will come in two maturities — three and 10 years.

Sources say it could be launched in the first week of January. 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.

This will attract retail customers to the bond market, a long-standing pipe dream of the government and the regulator, and will deepen the corporate bond market in the long run. Investors can buy a unit of the ETF for as low as Rs 1,000, the government said in a statement.

Debt market specialists welcomed the move and said this will help increase the interest of retail investors in the debt market, which gives a predictable set of returns with minimum to no risk.

“A retail investor is put off by jargons such as ‘accrued interest’, ‘clean price’, ‘dirty price’, etc. To an investor, the ETF is like a mutual fund, with clear NAV structure, and is exchange traded. This is something that one can understand,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance.

“Anything that simplifies investments for a retail investor is always welcome,” Kulhalli said.

The bond ETF will provide safety, since the underlying bonds would be issued by government-linked entities, liquidity, and predictable tax efficient returns, the statement said.

“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 because of liquidity and accessibility constraints,” the statement said, adding the investment would be tax efficient compared to bonds as coupons from the bonds are taxed at marginal rates, while the bond ETFs are taxed “with the benefit of indexation which significantly reduces the tax on capital gains for investor”.

“It will be the first corporate bond ETF, which will provide additional money for PSUs as well as other government organisations,” Finance Minister Nirmala Sitharaman said, while announcing the product.

The bond ETF will lead over the years to the development of a “complete yield curve of high quality public sector bonds, bringing transparency in bond pricing.  Borrowers will now have a wider range of tenors in which to borrow, and investors a full range of debt products to match their investment time horizons,” said Radhika Gupta, CEO of Edelweiss AMC.

Pankaj Agrawal, associate director of A K Capital, said: “Transparency, liquidity and wider investor participation were the guiding principles of the bond ETF and it will be win win for both the issuers and investors. The Bharat Bond ETF will be a paradigm shift in Indian corporate bond market,” said.

Central public sector undertakings (CPSUs), central public sector enterprises (CPSEs), central public financial institutions (CPFIs) and other government organisations will find it easier to raise funds through this ETF, and will lead to a better price discovery. The ETF will be a basket of bonds issued by these entities. 

Eventually, the government plans to bring a debt issuance calendar of state-owned entities. This broad debt calendar to assess the borrowing needs of the CPSEs would be prepared and approved each year, the statement said. 

The cost to be paid by the investors to fund manager Edelweiss AMC would be only 0.0005 per cent. Initially, AAA rated bonds would constitute the debt ETF. There would be periodic live net asset value (NAV) during the day, and that will be disclosed daily on website.