New Delhi: In November, an exchange-traded fund (ETF) of India’s state-owned companies got a record Rs32,000 crore ($5 billion) of bids.

Prime Minister Narendra Modi’s administration wants to replicate the success it’s had in equities by selling an ETF comprising debt of public sector firms.

The fund will offer investors a basket of bonds issued by 15 companies, including the triple-A rated Oil & Natural Gas Corp., Rural Electrification Corp., Housing and Urban Development Corp. and NTPC Ltd, said Neeraj Kumar Gupta, secretary, department of investment and public asset management. An ETF structure would help the firms reduce borrowing costs and widen their reach of the nation’s $102-billion bond market.

“The government’s policy is very clear—it wants to nudge all public sector enterprises to borrow against their net worth," Gupta said in an interview in New Delhi.

The plan, part of the federal budget presented by finance minister Arun Jaitley last week, is an attempt by the government to deepen India’s debt market by prompting more companies to raise funds and boost retail participation. Corporate debt instruments in India aren’t very popular among individual investors, with sovereign debt accounting for more than three-fourth of the market, according to Crisil Ltd, an Indian unit of S&P Global Co.

“The product could de-risk banks and offer investors a better choice," said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd, the local unit of Moody’s Investors Service. “The Indian debt market is dominated by institutions and though the issuer could be ready, you need investors to buy."

Bond offerings by state companies made up about 34% of the market, Gupta said. Issuance are forecast to grow 20-22% in the year to March, according to ICRA. The government is in the process of appointing consultants for the ETF, Gupta said. Bloomberg

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