India’s first Bond ETF will have basket of CPSU AAA rated bonds with two maturities series of 3 years and 10 years
Can the creation of the first ever umbrella bond Exchange Traded Fund (ETF), announced by Finance Minister Nirmala Sitharaman shift the needle for the bond markets? What are the challenges on the way? And what are the aspects to look forward?
To answer the above questions, ETCFO spoke with experts & finance executives, and the different viewpoints have emerged.
The Cabinet on Wednesday given the in-principle nod to the launch of bond exchange traded fund. This is on similar lines with the two equity exchange traded funds launched in 2014 and 2017, respectively. The government plans to replicate the success of the equity ETFs through the bond ETF. The bond ETF’s units will be priced in the range of Rs 1000, and have maturities of three and ten years. The move is aimed at deepening the bond markets through retail participation. The issuers will be the Central Public Sector Enterprises and the Public Finance Companies. More details will come out later, the FM said.
“I don’t know whether it will achieve the whole objective. This is more to raise money for the infra companies and reduce debt burden of the PSUs. It can reduce dependence on bank funding but bond markets will not significantly deepen,” said Hiranya Ashar, former CFO, Rolta India, who is now the co-founder and MD at capital advisory firm Axcelus Finserv.
“This product can at best replace fixed deposits. It will be concentrated in the hands of large investors who buy and hold it. There won’t be much trading and therefore, liquidity will be a challenge,” Ashar added indicating retail participation seems tough.
Bond markets are currently dominated by high rated issuers with ratings like AAA or more. Papers of companies below AAA find it difficult to get interest from even large domestic financial institutions including mutual funds or pension funds etc, let alone retail investors. In the bond ETF announced, only borrowers with higher ratings of AAA make the first cut.
CFO at Metropolitan Stock Exchange of India, Kunal Sanghavi, hailed the move, saying the decision was much awaited by the bond markets. The bond ETF product is relatively safer than other debt products, since it is government backed, and corporates, and domestic financial institutions should comfortably invest in them, adding to that he said it will be difficult to lure retail investors though.
“If the bond ETF provides slightly better returns (than other debt funds) in the range of 7.5 to 9 per cent it will be an attractive investment,” said Sanghavi.
Prakarsh Gagdani, CEO of 5paisa.com, a subsidiary company of IIFL, agreed to this narrative but slightly differed saying even retail investors wouldn’t shy away from buying the product.
There are very less options for retail investors to invest in bonds. But if one sees this product, the ticket size is less, and it is going to be listed on the exchanges, so there is comfort. We as a financial intermediary will certainly push our customers to buy.Prakarsh Gagdani, CEO of 5paisa.com
An asset management company is now likely to discuss the borrowing requirements of the issuer, and then accordingly seek the approval from the market regulator Securities and Exchange Board of India for the launch of the fund. Investors can buy and sell the units through the exchange, market makers, or via Asset Management Company.
It would augur well for the success of the product if the regulators start providing domestic financial institutions a separate quota for the bond ETF, a former CIO at a fund house who is now head debt markets, said requesting anonymity. “It will be a blockbuster success if pension, provident, and insurance funds can have clarity on how much they can invest in these products by carving out a quota for bond ETF,” the person said.
There will be more to the fine print of the bond ETF framework, said Shalibhadra Shah, CFO of the brokerage firm Motilal Oswal. “Have to wait and watch how the final prints of bond ETF shapes up the market appetite considering the yields and tax benefits it would provide,” he concluded.