ETFs

India approves creation of first bond ETF

Credit: REUTERS/FRANCIS MASCARENHAS

India's cabinet has approved the launch of the country's first debt exchange traded fund to deepen the debt market and help state-owned companies meet part of their borrowing requirements.

By Krishna Merchant

MUMBAI, Dec 4 (IFR) - India's cabinet has approved the launch of the country's first debt exchange traded fund to deepen the debt market and help state-owned companies meet part of their borrowing requirements.

Finance Minister Nirmala Sitharaman said at a press conference today after a cabinet meeting that the Bharat Bond Exchange Traded Fund will include the bonds of AAA rated public sector enterprises and come in two tranches with maturities of three and 10 years.

India aims to raise Rs150bn (US$2.1bn) from the first tranche of the umbrella bond ETF that will launch on December 12 and close on December 20. This tranche will hold the bonds of eight to 10 central PSEs and track a benchmark, with the units priced at Rs1,000 each and offered through exchanges, asset management companies, distributors and arrangers, according to sources close to the plan. Market makers will ensure there is sufficient liquidity.

As well as deepening the debt market, the ETF will create an additional source of borrowing for public sector companies and allow retail investors to participate in the market, Sitharaman said. "The government will not squeeze out the private sector."

At the end of the first year after the launch of the ETF, a renewed offer will be made for both tranches, Sitharaman said.

India's market regulator announced rules for debt ETFs last week.

The Securities and Exchange Board of India said that the index created for debt ETFs should have a minimum of eight issuers, and no single issuer will have more than a 15% weighting in the index. The ratings of the ETF constituents should be investment grade with defined credit ratings and maturities.

The move was first announced in the February 2018 budget speech by former finance minister Arun Jaitley and follows the hugely successful introduction of equity ETFs, which helped the government divest otherwise illiquid stakes in state-owned companies.

Sebi said the debt ETF will replicate an unspecified index, but if specific securities within the index are not available an ETF can invest in other debt securities from the same issuer, as long as there is a deviation of no more than 10% of the weighted average duration of the securities in the index. At the aggregate portfolio level, the debt ETF fund should not deviate more than 5% from the duration of the index.

If the credit rating of a debt ETF falls below investment grade, it should be rebalanced within five working days, it said.

Debt ETFs must adhere to the new norms within three months of the issuance of the circular on November 29. The rules are not applicable to indexes which have government securities, treasury bills or tri-party repos as constituents.

The government appointed AK Capital Services as the sole adviser for the ETF plan in July last year, and mandated Edelweiss Asset Management to manage the fund in January.

(Reporting by Krishna Merchant; Editing by David Holland)

((Krishna.Merchant@thomsonreuters.com; +65 64174544;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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