What are Municipal Bonds?

The governments in India at various levels – the centre, states and local bodies need money to finance its expenditure. Among the three, the centre is very powerful and is having different sources of revenue and borrowings to finance its budget. The central government’s fiscal deficit or borrowing that amounts to nearly 3.2% of GDP is mostly financed out of the borrowing made through the sale of dated securities or bonds and treasury bills.

For the state governments similarly, there is the State Development Loans, which is a form of bond, sold in the market.

Now, for the local bodies – Municipalities and Pachayaths, there are only limited revenues and more importantly, very limited options to borrow from the market. At the same time, the local bodies need big money to finance their core development functions. SEBI has issued a detailed guideline in 2015 for urban local bodies to mobilise money through the issue of municipal bonds.

What is Municipal bonds?

Municipal bonds are bonds issued by urban local bodies- municipal bodies and municipal corporates (entities owned by municipal bodies) to raise money for financing specific projects specifically infrastructure projects. These bonds are attracting attention as the ULBs urgently need money to finance infrastructural expenditure. Especially, smart cities and other urban development projects necessitates them to create finance.

Municipal bonds are there in India from 1997 onwards. Bangalore Municipal Corporation was the first ULB to issue Municipal Bond in India in 1997. Ahmedabad made a notable issue in the next years. But after the initial momentum, the ULBs were not able to get much progress on municipal bond based fund mobilization. In 2015, SEBI made fresh guidelines for the issue of municipal bonds for enabling the ULBs to mobilise money.

SEBI Guidelines on municipal bonds: Which ULB can issue muni bonds?

As per the SEBI Regulations, 2015, a municipality or a Corporate Municipal Entity (CME) should meet certain conditions:

  • The ULB should not have negative net worth in any of three immediately preceding financial years.
  • Non-default: The municipality should not have defaulted in repayment of debt securities or loans obtained from banks or financial institutions during the last 365 days.
  • Now wilful defaulter: The corporate municipal entity, its promoter, group company or director(s), should not have been named in the list of the wilful defaulters published by the RBI or should not have defaulted of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any.

SEBI instructs that municipal bonds should have mandatory ratings above investment grade for pubic issue. The bonds should have a three-year maturity period and financial institutions including banks should be appointed as monetary agencies.

Tax status of Municipal Bonds

Municipal bonds in India has tax-free status if they conform to certain rules and their interest rates will be market-linked. Both pubic issue and private issue can be adopted for municipal bonds.

SEBI allowed urban local bodies to raise money through the issue of revenue bonds as well.  Municipal bonds where the funds raised are kept for one project are termed revenue bonds. Servicing of these bonds can be made from revenue accrued from the project.

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