The Union Cabinet has given its approval for the launch of Bharat Bond – India’s first exchange-traded fund (ETF).
- The government has created the Bharat Bond Exchange Traded Fund (ETF) as 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.
- With the approval from the Cabinet Committee on Economic Affairs, the Bharat Bond ETF will become the country’s first corporate bond ETF.
- The WTF will have an assortment of bonds issued by CPSEs, CPFIs, CPSUs, and other government organisations.
- All the bonds will be AAA-rated bonds.
- Each unit size of the bond has been kept at Rs. 1000 to attract retail investors.
- The maturity period for the ETF is fixed and initially will be issued for 3 years and 10 years.
- The bond ETF provides safety of investment, liquidity and predictable tax as the underlying bonds are of government-owned entities and the bonds can be traded on exchange.
- The government is of the opinion that the ETF will penetrate the bond market deeper as it will attract retail investors who are not participating in the bond market at present.
- For the issuers of bonds, the ETF is an alternate source for their funding requirements which are now dependent on bank finances.
- With the participation of retail investors and High Net worth individuals, the demand for the ETF will rise and the band issuers can get funds at reduced costs.
- An ETF is a financial instrument that can be traded on exchanges similar to stocks.
- The holding assets of an ETF can be stocks, commodities or bonds.
- Though India has Equity ETF, the Bharat Bond will be the first Bond ETF of the country.
Corporate Bond Market
- The corporate bond market in India is small in scale compared to big economies.
- The corporate debt to GDP ratio is 17 percent in the country compared to 123% in the US and 19% in China.
- One of the reasons for the slow growth of the corporate bond market in the country is a narrow investor base.
- Corporate bond investors are predominantly institutional investors with only 3% of the investors being retail investors.
- Though several initiatives have been taken to spur the corporate bond market in the country, it still plays a small role in long-term debt requirements for private players.
- A mature corporate bond market will help finance long-term projects, especially infrastructural projects in a fast-growing economy like India.
- For this to happen, attracting retail investors is the key.
- In this scenario, the creation of Bharat Bond ETF with its low unit cost has the potential to attract retail investors.
- Hopefully, there will be a spurt in activity in the corporate bond market of the country.