Cabinet okays bond ETFs

Bharat Bond ETF would be India’s first corporate bond exchange traded fund

Updated - December 04, 2019 11:03 pm IST

Published - December 04, 2019 10:22 pm IST - NEW DELHI

The Union Cabinet on Wednesday approved the government’s plan to create and launch India’s first corporate bond exchange traded fund (ETF) — Bharat Bond ETF.

“The Cabinet Committee on Economic Affairs has given its approval for creation and launch of Bharat Bond Exchange Traded Fund (ETF) to 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,” the government said in a release.

“Bharat Bond ETF would be the first corporate bond ETF in the country,” it added. The ETF will comprise a basket of bonds issued by the CPSEs, CPSUs, CPFIs, and other government organisations and all will be initially AAA-rated bonds.

“The unit size of the bond has been kept at just ₹1,000 so that retail investors can invest and it’s not a matter of having crores to invest,” Finance Minister Nirmala Sitharaman said at a press conference following the Cabinet meeting.

Each ETF will have a fixed maturity date and initially they will be issued in two series, of three years and 10 years.

“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,” the government release added.

The low unit value of ₹1,000, it said, would help deepen India’s bond market as it will encourage the participation of those retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.

Additional source

On the issuer side, the bond ETFs are expected to 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 [high net worth individual] participation, which can increase demand for their bonds,” the government added. “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.”

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