Debt mobilisation via this route might rise to Rs 50,000 crore or higher in FY22
Bharat Bond exchange trade fund (ETF), a key instrument for central public sector enterprises (CPSEs) to raise debt capital from a larger pool of sources including retail investors, is looking to mobilise over Rs 34,000 crore in FY21, up 174% over such funds raised by it during the last fiscal year. As the Centre wants to assist CPSEs in need of capital – many state-run firms through which the government implements its various schemes are constituents of Bharat Bond ETF – debt mobilisation via this route might rise further to Rs 50,000 crore or higher in FY22 and beyond, official sources said.
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 second tranche will hit the market in July with a base offer size of Rs 3,000 crore and a green shoe option to raise another Rs 11,000 crore by retaining extra subscriptions. The funds collected will be invested in two new series of AAA-rated CPSE bonds with maturity profile of 5 years and 11 years, depending on the choice of investors.
The fund mobilisation in the upcoming tranche could have been even higher had the lockdown to check spread of Covid-19 not hindered investor outreach and coordination with the CPSEs, the source said. CPSEs raised about Rs 25,000 crore through individual bond issuances in April, which could have been made part of the debt ETF.
“Besides the tranche in July, there will likely be another big tranche and a few smaller re-issuances of existing series of bonds papers this fiscal,” the source said. 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.
In its maiden offer in December last year, Bharat Bond ETF had mobilised Rs 12,400 crore for the CPSEs via two investment options — a short-term instrument for 3 years (Bharat Bond ETF April 2023) and a long-term one for 10 years (Bharat Bond ETF April 2030). The ETF’s new fund offer (NFO) of Rs 7,000 crore, saw participation of 55,000 retail investors, was oversubscribed by nearly 1.8 times. The assets under management (AUM) of the debt ETF has since grown to around Rs 14,000 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 Rs 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 expects 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. Nabard is planning to raise between Rs 700-1,000 crore through 5-year papers in the upcoming ETF tranche. “Nabard can route up to 25% of its own market borrowing through the debt ETF depending on the yield and other factors (availability of the product),” a senior Nabard official 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 May 26, the index yield was 6.76% for the 2030 investment option, higher than the 5.9% for the 10-year G-sec. The yield was 5.61% for the 2023 option, against 4.6% for three-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%.