Finance Minister Nirmala Sitharaman on Sunday proposed to introduce total return swaps to deepen the corporate bond market.
“I propose to introduce a market making framework with suitable access to funds and derivatives on corporate bond indices. I also propose to introduce total return swaps on corporate bonds,” Sitharaman said in her Budget speech.
A total return swap is a structure where an investor does not directly own a bond, but enters into an agreement with a bank or custodian which holds the bond on its books.
The investor receives the bond’s total economic return, including interest and price movement, while paying a pre-agreed rate. This allows participation in the bond market without owning the underlying securities.
Hedging Interest Risk
Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat, said, “Allowing derivatives instruments like total return swaps to hedge the interest rate risk emanating from a corporate bond portfolio serves as a good way of providing cushion to investors, thereby eliminating any potential challenges that the market could face from achieving the desired depth.”
Municipal Bond Incentives
Also, to encourage issuance of municipal bonds of higher value by large cities, it has been proposed to provide an incentive of Rs 100 crore for a single bond issuance of more than Rs 1,000 crore. “The current scheme under AMRUT which incentivises issuances of up to Rs 200 crore will also continue to support smaller and medium towns,” Sitharaman said.
“While these initiatives are encouraging, their impact will depend on the final policy framework and the pace of implementation,” Deepak Agrawal, CIO – debt, Kotak Mahindra AMC, said.