From UPSC perspective, the following things are important :
Prelims level : Bharat Bond Exchange Traded Fund (ETF)
Mains level : Not Much
The Union Cabinet has given its approval for creation and launch of Bharat Bond Exchange Traded Fund (ETF).
Bharat Bond ETF
- Bharat Bond ETF would be the first corporate Bond ETF in the country.
- It 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.
- ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds.
- Tradable on exchange
- Small unit size Rs 1,000
- Transparent NAV (Periodic live NAV during the day)
- Transparent Portfolio (Daily disclosure on website)
- Low cost (0.0005%)
Bharat Bond ETF Structure:
- Each ETF will have a fixed maturity date
- The ETF will track the underlying Index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index
- 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
- 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.
- Index will be constructed by an independent index provider – National Sock Exchange
- Different indices tracking specific maturity years – 3 and 10 years
Benefits to investors
- 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).
- 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 due to liquidity and accessibility constraints.
- 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.
Benefits for CPSEs
- Bond ETF would offer CPSEs, CPSUs, CPFIs and other Government organizations an additional source of meeting their borrowing requirements apart from bank financing.
- 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.
- Further, Bond ETF trading on the exchange will help in better price discovery of the underlying bonds.
- 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.