SLATE. All you wanted to know about: Municipal Bonds

SEBI has come up with new norms on municipal bonds in India. The new rules would help local bodies raise money from the public for infra development.

Say your city corporation wants to set up a new Metro rail network. It can issue municipal bonds to fund the project. Institutional investors as well as the public can buy these bonds. Revenues from the Metro will then be used to repay the interest and principal on these bonds.

Municipal bonds where the funds raised are earmarked for one project are termed revenue bonds. These have now been permitted for public offering by SEBI.

Municipal bonds have been in existence in India since 1997. Cities such as Ahmedabad, Bengaluru, Nashik and Madurai have issued them; mostly privately placed with institutions, and not tradable. As a result, the municipal bond issues only touched ₹1,353 crores and there have been no new issues since 2010. The new rules that will allow these instruments to be offered to the public, listed and traded on stock exchanges will hopefully rekindle the appetite for them.

Solving urban infrastructure problems requires a lot of money. ‘Muni bond’ issues could help corporations directly raise funds without looking to State grants or agencies such as World Bank. Large institutional investors such as pension funds and insurance companies are always on the lookout for look for less risky avenues to invest. Municipal bonds could tap these sources of fund and help get many projects off the ground.

Rating agency CARE estimates that large municipalities in India could raise ₹1,000 to ₹1,500 crore every year through municipal bond issues. These bonds have been used successfully by local governments in the US and China. In the US, municipal bond market is around $3.7 trillion and in China $187 billion.

While the benefits to local bodies may be clear enough, can you trust your corporation to pay you the interest and principal on time? Take the case of China where there are now fears of default by local governments that have raked in debt totalling $2.9 trillion. S&P believes that nearly half of the issuers ‘only deserve junk rating’. But SEBI has quite a few safeguards to ensure that the risks in Indian municipal bonds are reduced.

The money raised from municipal bonds can boost quality of life in cities. Job prospects in the locality may also look up. These bonds may also prove a good investment option for investors looking beyond fixed deposits and small saving schemes.

Municipal bonds in India enjoy tax-free status if they conform to certain rules and their interest rates will be market-linked. Their tradability means you need not have to hold them till maturity.

SEBI has put in place several conditions for city corporations to tap the public. One, the corporation needs to have investment grade credit rating and must contribute at least 20 per cent of the project cost. Two, it must not have defaulted on any loans in the last one year. Three, it required to maintain full asset cover to repay the principal amount. Revenues from the project for which bonds were raised are to be kept in a separate escrow account. And banks or financial institutions would monitor the account regularly.

Wondering what you’re getting in return for the taxes you pay to the municipality? Well, here’s your chance to ask for your share.

A weekly column that puts the fun into learning

COMMENT NOW