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New debt ETFs, comprising Government Securities, proposed in effort to deepen bond markets

HYDERABAD: Following the successful Bharat ETF issue, the government has decided to introduce a new debt Exchange Traded Fund (ETF) comprising Government Securities (G-Secs).

On Saturday, Finance Minister Nirmala Sitharaman announced the proposed ETFs to deepen the bond markets and provide choice to retail investors. Besides, as part of her budget proposals, the finance minister increased investments in corporate bond limit by the foreign portfolio investments (FPIs) from nine per cent to 15 per cent to deepen the bond market.

“For the financial markets, deepening the bond market is the key. Some government securities will be open for non-resident investors. To improve investor confidence, a legislation on laying down mechanism for netting of financial contracts will be done. A debt ETF consisting of government securities will be launched. For non-banking financial companies (NBFCs) and housing finance companies (HFCs), liquidity constraints will be addressed. The FPI limit in corporate bonds will be raised to 15 per cent from nine per cent,” said the finance minister said in her Budget speech.

G-Secs are long tenure bonds and are considered risky given their sensitivity to interest rate changes in the economy. However, the proposed issues of G-Secs-led ETFs will complement debt ETFs and lower the government’s cost of borrowings. Along with bonds of AAA rates public sector undertakings (PSUs), G-Secs will make the proposed debt ETF far more attractive for investors.

According to global analytical company Crisil, the immediate gains in the corporate bond limit from nine per cent to 15 per cent is unlikely as only 60 per cent of the current limit is utilized now. The entry of government securities will add enhanced liquidity, enhances investors base and transparency and smoothening of borrowing plans of the participating central public sector enterprises (CPSEs).

Traditionally, the debt market comprises both the government securities market and the corporate debt market and G-Secs account for over 79 per cent of the total outstanding amount of bonds in India. Meanwhile, the Union Budget has also proposed to allow invoice financing by NBFCs to help micro, small and medium enterprises (MSMEs).

According to MSME Export Promotion Council chairman DS Rawat, invoice financing by NBFCs will help the sector immensely, but it should be applicable to all registered as well as non-registered units.

According to Rawat, the government should make it applicable to all units operating from conforming as well as non-conforming areas. An ETF is a mode of investment that comprises a basket of stocks or bonds that are traded, similar to individual stocks, on an exchange during regular trading hours.