BHARAT BOND EXCHANGE traded fund (ETF), which has the potential to emerge as a key instrument for central public sector enterprises (CPSEs) to raise debt from a larger market, including retail investors, will mobilise at least Rs 10,000 crore more in the current financial year, in addition to Rs 11,000 crore mopped up in July. In its maiden offer in December last year, Bharat Bond ETF had mobilised Rs 12,400 crore. According to sources, the mop-up will be almost double that amount in FY21.
As the Centre wants to assist CPSEs in dire need of capital—many state-run firms through which the government implements its various subsidy/welfare schemes are constituents of Bharat Bond ETF—debt mobilisation via this route might rise significantly further in FY22 and beyond, official sources told FE. From the perspective of investors, the quasi-sovereign nature of the CPSE bonds in the index is an attraction, so are the low entry barrier and expense ratio. According to a source, Bharat Bond’s third tranche will hit the market in Q4FY21.
“There is a lot of demand for Bharat Bond ETF. There will be another tranche by end-March,” a senior official told FE. The debt ETF is initiated by the department of investment and public asset management (DIPAM) and managed by Edelweiss Asset Management. The ETF would help the CPSEs, which together raise around Rs 2.5 lakh crore a year through bonds, to create a much wider investor base than they do through private placements. Currently, 98% of the CPSE bonds are privately placed with a limited pool of institutional investors, denying investment opportunities to retail buyers.
The ETF’s first series in December last year, saw the participation of 55,000 retail investors, was oversubscribed by nearly 1.8 times with subscription of Rs 12,400 crore. The assets under management (AUM) of the debt ETF has since grown to around Rs 15,905 crore. Bharat Bond’s second series in July this fiscal was oversubscribed by 3.7 times across 40,000 applications and subscription of about Rs 11,000 crore. The AUM of the second series debt ETF has since grown to around Rs 13,326 crore.
For investors, especially retail investors, the product gives an opportunity to participate in the CPSE bonds with an abysmally low annual expense ratio of 0.0005% or Re 1 per Rs 2 lakh compared with 1-1.5% or Rs 2,000-3,000 for debt mutual funds. The minimum investment amount (for retail investors)and unit price in the CPSE debt ETF is Rs 1,000, compared with Rs 1 lakh/unit in corporate bond issuances. The government expect the ETF to evolve as an alternative and robust tool for mobilising medium-long term financing for CPSEs such as the National Highways Authority of India, Power Finance Corporation, REC, Nabard, among others.
Given the massive capex push through CPSEs and departmental undertakings, which are projected to invest close to Rs 5 lakh crore in FY21 and rise substantially year-on year thereafter, the low-cost ETF route will likely be tapped more aggressively in the coming years, sources said. So far, trading and liquidity has been robust in the Bharat Bond ETF.
Bharat Bond ETF is an open-ended fixed maturity exchange-traded bond fund that seeks to track the returns provided by Nifty BHARAT Bond Index. As on November 11, the index yield was 6.6% for the 2030 bond maturity investment option, higher than the 5.9% for the 10-year G-sec. The yield was 5.43% for the 2025 option, against 5.17% for 5-year G-secs.
As the investment is in fixed-income securities, short term capital gain (STCG) is taxed at the marginal rate of taxation and long term capital gain (LTCG) after three years is taxed at 20.