India to launch first debt exchange-traded fund

Thursday, 5 December 2019 00:00 - - {{hitsCtrl.values.hits}}

Finance Minister Nirmala Sitharaman

New Delhi (Reuters): India will launch its first debt exchange-traded fund (EFT) comprising debt of state-run companies, Finance Minister Nirmala Sitharaman said on Wednesday, in a bid to allow retail investors to buy government debt.

“It will be the first corporate ETF, which will provide additional money for PSUs (public sector undertakings) as well as other government organisations,” Sitharaman told reporters, after the proposal was approved by the cabinet chaired by Prime Minister Narendra Modi.

The ETF, called Bharat Bond ETF, will have a fixed maturity of three and ten years and will trade on the local stock exchange. It will invest in a portfolio of bonds of state-run companies and other government entities, a government statement said.

Retail investors will be able to invest in the bonds with as little as 1,000 rupees ($14), it said.

The move reflects Modi’s push to ease rules for state companies to raise funds through debt instruments and further develop domestic capital markets.

“It is a positive development for retail investors,” said A. Prasanna, head of fixed income research at ICICI Securities Primary Dealership in Mumbai.

“Compared to existing options, the new ETF will have a lower fees and better tax treatment,” he said, adding it was unlikely to have a big impact in the short term on corporate bond market.

India has so far allowed only equity ETFs, and the government raised nearly 144 billion rupees ($2 billion) through ETFs in the 2019/20 fiscal year beginning April.

In general, ETFs have become a popular investment vehicle for investors because they allow them to invest in a diverse collection of assets.

According to government estimates, India’s state-run social security fund, Employees Provident Fund (EPFO), has invested about 870 billion rupees in ETFs.

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