Apparently enthused by the success of the CPSE and Bharat-22 Exchange Traded Funds (ETFs) that have helped it shed minority equity stakes in public sector undertakings (PSUs), the Centre has now opted to take the same route for debt fund-raising by PSUs.

The Bharat Bond ETF, to be managed by Edelweiss Mutual Fund, bundles bond issuances from multiple PSUs into a single close-end fund, units in which will be offered to public investors during an initial offer period from December 12 to December 20.

To begin with, the bond ETF will be offered in two versions – one maturing in 2023 and one in 2030. While the 2023 ETF will have 13 PSUs led by REC, NABARD, PFC, HUDCO and Exim Bank, the 2030 one features NHAI, IRFC, PowerGrid Corporation, REC and NTPC among its 12 PSU issuers. As far as innovative fund-raising solutions go, the Bharat Bond ETF has its pluses both for the Centre and for the under-developed Indian bond market.

Read more: With Bharat Bond ETF, Cabinet opens PSU debt to retail investors

From a bond market perspective, this ETF offering may help popularise a new asset class, while infusing more transparency into the market borrowings of quasi-government entities. PSUs and quasi-government entities today play a significant role in implementing both the welfare and capex plans outlined in the Union Budget. They take recourse to substantial market borrowings to fund these efforts. But with such loans effectively remaining off-balance sheet for the Government, budget-watchers have been fretting about official deficit numbers being under-stated.

Routing PSU borrowings through the Bharat Bond ETF is likely usher in more transparency as the borrowing calendar of the PSUs, the amount of funds they raise as well as their borrowing costs, will all be in the public domain, and thus subject to greater public scrutiny.

For informed debt investors, this ETF opens up an avenue to buy into a diversified basket of bonds at a very low management fee, through a tax efficient structure that beats direct investments.

In the first tranche of the Bharat Bond ETF, care has also been taken to make the fund palatable to retail investors by reining in both the interest rate and credit risks usually associated with traded bonds. The fund’s target maturity structure makes its yield predictable for investors who hold it till maturity date. The focus on AAA-rated entities reduces (though it doesn’t completely mitigate) default risk.

But having said this, a bond ETF is a complex route to take for the small investor seeking fixed income. Buying into the ETF involves taking a call on the long-term prospects of the many issuers making up the portfolio and the future direction of interest rates. Should PSU borrowing rates spike up in future, investors in this ETF would forego an opportunity to earn better rates. While pre-term exit on the ETF is available through secondary markets, this is subject to adequate liquidity and will need close tracking of the ETF’s yield and traded prices. The ETF is accessible only to investors who own demat accounts and offers only cumulative interest. Overall, while taking the ETF route to PSU borrowings may have its uses for the Centre, it isn’t desirable to make this the only route for quasi-government entities to raise public money. Less informed savers in India are truly starved of long-term options that offer fixed income with safety. In the past, 10-year National Savings Certificates and public issues of infrastructure/tax-free bonds by PSUs offered a simpler solution to such investors. Those routes need to be resurrected too.

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Published on December 9, 2019