 "Municipal bonds: Centre plans push to new round")
The government is making a fresh push for Tier-II and Tier-III cities to issue municipal bonds, as this would help in financing projects under the Smart Cities initiative. The starting point will be a project to issue a fresh round of such instruments in five or six months, Business Standard has learnt from senior government sources.
The finance and urban development ministries are trying to identify cities whose urban local or municipal bodies could issue such bonds to finance specific projects. Such cities must meet norms in this regard of the Securities and Exchange Board of India (Sebi) and of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM).
Under Sebi’s norms earlier this year, municipal bodies need to have a strong financial record. There should been no negative net worth in any of three immediately preceding financial years and no default in repayment of debt securities or loans from banks or financial institutions in the past year.
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Under JNNURM (it was an important scheme of the previous government), urban local bodies to qualify needed to adopt a modern and accrual-based double entry system of accounting; their books have to be in order and audited regularly.
“A number of Tier-II and III cities have cleaned their books, switched to double accounting and have got audited. This puts them in a position where their bonds could get investment-grade ratings and be able to attract investors,” said a senior official.
Although officials declined to specifically name the cities whose names are being discussed, these are understood to be from Gujarat, Odisha, Andhra, Maharashtra, Tamil Nadu, Madhya Pradesh and Chhattisgarh. The first of such issuances is expected to hit the markets in five-six months.
According to Sebi guidelines, any municipal body issuing debt securities to public must have the bonds listed on an exchange and get a rating from at least one credit rating agency.
An urban local body (ULB) making public issue of debt securities can only issue revenue bonds. The revenue bonds would have a maximum tenure of 30 years or such period as specified by Sebi from time to time. The issuer shall appoint at least one merchant banker.
The market for municipal bonds has existed in India from 1998, when Ahmedabad became the first Indian city to issue municipal bonds. However, in the past 16 years, 25 municipal bond issues in the country have garnered about $300 million, according a report by Mukul Asher of National University of Singapore and Shahana Sheikh of the Centre for Policy Research, New Delhi. The amount is just a fraction of what it is in developed markets like the US, where the municipal bond market is worth $3 trillion.
Analysts and policy watchers say the market for such bonds has not picked up in India for various reasons, including lack of interest amongst investors, the sorry state of finances of many ULBs, shoddy accounting of the ULBs’ books, bureaucratic hurdles and lack of interest at the central and state levels, and the issue of who will guarantee the bonds.
