With tax tweaks, Indian bonds may soon get listed on global indices

Such a listing would help the country attract more foreign funds and use the proceeds for it infrastructure projects

foreign direct investment, retail sector, Nirmala Sitharaman, Budget 2019, Finance Minister, FDI, The Federal, English news website
Morgan Stanley has said that inclusion into global indices would help India attract $40 billion of inflows into its debt market over the next two years. (Representational image)

A recent Finance Ministry proposal to tweak the tax structure for sovereign bonds — designed to woo domestic investors — may help the debt instruments get listed on global indices.

In Budget 2022, Union Finance Minister Nirmala Sitharaman is reportedly set to propose tax exemption for Euroclear settlements. Euroclear is a clearinghouse that clears and settles securities trades carried out on European exchanges. Besides, it functions as a central securities depository, acting as a custodian for major financial institutions operating in European markets.

Key conditions

Once the budget proposal goes through, Indian sovereign bonds may be eligible for listing on global indices, and this may come as early as March-end, said a Bloomberg report.

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A listing on global indices such as JPMorgan Chase and FTSE Russell would help India attract foreign investors, and use the proceeds to fund its infrastructure projects. Morgan Stanley has said that inclusion into global indices would help India attract $40 billion of inflows into its debt market over the next two years.

For such a listing, Indian bonds needs to be linked with global depositories such as Euroclear, as well as make the required tax tweaks. While settlement via depositories like Euroclear is not the only condition, or a strict necessity, it acts as enabler and provides greater liquidity, Bloomberg said in an earlier report.

The tax angle

Currently, bonds attract capital gains tax (CGT) and Euroclear doesn’t charge CGT on debt transactions. The tax structure mismatch is preventing Indian bonds from being included on global indices. Media reports said other countries listed on Euroclear do not levy CGT on bond transactions.

For long, index providers such as JPMorgan Chase have been seeking settlement of Indian bonds on Euroclear. In fact, said JPMorgan in a note, an inclusion in Euroclear’s emerging-market bond index would help it mop up $25 billion from foreign investors.

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