Clean-up act

The municipal bond market in India is coming alive after prolonged hibernation, with Pune Municipal Corporation (PMC) raising ₹200 crore in the first tranche of a proposed ₹2,264-crore offer, and listing the bond on BSE last week. The ten-year bond offer carrying a coupon of 7.59 per cent was over-subscribed six times, raising hopes that future offers will be well-received. No doubt, the take-off of the municipal bond market is critical for India’s large cities and towns to upgrade their creaking infrastructure, to accommodate a burgeoning population. The ability of municipal bodies to be self-sustaining is also critical to the success of the Centre’s pet projects such as Smart Cities and AMRUT (Atal Mission for Rejuvenation and Urban Transformation). After their recent profligacy with farm loan waivers and the absorption of UDAY-related obligations, State government finances have little headroom to fund long-gestation capital requirements for such projects.

Despite a crying need for it, the municipal bond market has had a rough passage ever since it first flagged off in the late nineties. Between 1997 and 2010, the city corporations of Ahmedabad, Nashik and Bengaluru experimented with bond issues but barely managed to raise ₹1,400 crore. The fact that these bonds were not tradeable and lacked regulatory clarity made for poor investor response. SEBI’s detailed guidelines for the issue and listing of municipal bonds in March 2015, clarified their regulatory status and rendered them safer for investors. But with these new rules requiring municipal corporations to file a complete prospectus, obtain credit ratings, create an escrow account to segregate proceeds and appoint an independent agency to monitor end-use of funds, apart from having positive net worth, the bar was set too high for issuers. With SEBI recently doing away with the net worth criterion and replacing it with the requirement of a revenue surplus for three years, a few corporations are now likely to make the cut.

Having said this though, it is doubtful if PMC’s success will immediately clear the decks for a series of similar offers by other local bodies. For starters, the proceeds of this offer are specifically earmarked to fund PMC’s project to provide 24X7 water supply and there is an elaborate structured payment mechanism to service these bonds. PMC’s property and water tax collections, growing at a brisk pace, will be deposited every month into an escrow account towards servicing this debt. As city corporations go, PMC also has sound financials and is relatively well-run, which cannot be said for most local bodies. It has managed to steadily expand its revenue surplus in the last four years. In FY16, at ₹1,840 crore, its surplus was at nearly half its total income. It is these factors that have helped it secure a high investment grade rating of AA plus for its bonds. But perhaps, as PMC and other well-run local bodies like it taste market success, it will set an example for their peers to clean up their act. Market forces may be the best triggers to nudge India’s much-reviled local bodies towards professional accounting and public accountability on their opaque workings.

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