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Bharat bond

  Aug 06, 2020

Bharat bond

What is aim of Bharat Bond ETF?

Bharat Bond Exchange Traded Fund (ETF) aims 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 organizations.  Bharat Bond ETF would be the first corporate Bond ETF in the country. 

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. When trading on stock exchange we can buy/sell stocks of individual companies, however ETF allows us to buy/sell group of stocks as a single fund.

ETF buying/selling continue whole day, unlike mutual fund- which are also basket of funds – which are sold/bought at the end of the day when market closes.

Bharat bond ETF

BB ETF has bonds issued by CPSEs instead of shares. Thus, it allows retail investors to invest debt instruments of government enterprises. They become creditors of CPSEs and government organizations. 

What will be future impact of BB ETF?

This is expected to eventually increase the size of bond ETFs in India leading to achieving key objectives at a larger scale:

1.   Deepening bond markets,

2.   Enhancing retail participation,

3.   Reducing borrowing costs,

4.   Development of bond market will reduce pressure on Banks to fuel growth of India through credit and it will allow banks to take more profitable and secure businesses. This is particularly significant for PSB. 

What is structure of BB ETF and what are its features?

Bharat Bond ETF Structure:

1.   Each ETF will have a fixed maturity date

2.   Will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other Government organizations that matures on or before the maturity date of the ETF

3.   As of now, it will have 2 maturity series - 3 and 10 years. Each series will have a separate index of the same maturity series. 

Features of Bharat Bond ETF:

ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds (Initially, all AAA rated bonds)

1.   Tradable on exchange

2.   Small unit size Rs 1,000, Retail investors can now invest in Government Debt instruments    

3.   Transparent NAV (Periodic live NAV during the day)

4.   Transparent Portfolio (Daily disclosure on website) 

What are benefits of BB ETF to investors and CPSEs?

Benefits of Bharat Bond ETF to investors:

1.   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 (target maturity structure).

2.   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.

3.   This will increase participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.

4.   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. 

Bharat Bond ETF Benefits for CPSEs:

1.   Bond ETF would offer CPSEs, CPSUs, CPFIs and other Government organizations an additional source of meeting their borrowing requirements apart from bank financing.

2.   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.

3.   Further, Bond ETF trading on the exchange will help in better price discovery of the underlying bonds.

4.   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.