First bonds soon under Smart Cities scheme

Pune, Ahmedabad and the NDMC portion of Delhi preparing for launch; SBI Caps advisor in all these

After much dallying, three civic bodies are likely to hit the markets with municipal bonds by this month-end or the first week of July, to raise funds for providing amenities.

The three are the New Delhi Municipal Council (NDMC, the one for a 43 sq km slice in the centre of the capital), and the municipalities of Pune and Ahmedabad. The facilities are to be set up under the ‘Smart Cities’ mission and the Atal Mission for Rejuvenation and Urban Transformation.

In fact, Pune might come out with the bonds by next week itself. The municipality might not raise the entire amount of Rs 2,300 crore that it plans to mop at one go but might tap this route in phases, sources said. NDMC is likely to come out with a Rs 500-crore bond issue and  Ahmedabad for Rs 200-300 crore. 

The financial advisors to the bonds have been finalised. SBI Caps is one of the leading ones in all three, a source said.

These municipalities are among 26 cities that have been allowed to issue bonds. A total of Rs 7,500 crore is targeted to be so raised by these cities. 

While none of the first three bodies has got the highest, AAA, rating from agencies, all have AA- to AA+. These differ from the highest rating by a small degree. The bonds will have a ceiling of eight per cent on the coupon rate, sources said. They did not comment on the tenor but said it usually is from five to seven years.

Karthik Srinivasan, a financial sector ratings expert with ICRA, said papers of municipalities with AA ratings will definitely find takers. Depending on how trading on these proceed, this could create secondary markets for bonds as well. While municipal bonds have robust secondary markets in other parts of the world, this is not the case in India, he explained. 

The resources raised from the bonds would help meet urbanisation needs. Around Rs 39 lakh crore (at 2009-10 prices) is needed to build infrastructure such as roads, water supply and waste management systems over the next 20 years. According to the 2011 census, 377 million Indians, 31.1 per cent of the population, were living in urban areas. This number has been rapidly increasing — the United Nations Habitat World City 2016 report estimated India’s urban populace to have reached 420 mn in 2015.

The Centre has pledged Rs 48,000 crore in support of these efforts, spread over five years. An equivalent amount  will have to be raised by the urban local bodies, the respective state governments and a consortium of private entities. The Union Budget 2016-17 had earmarked Rs 3,205 crore for this.

The improvement of these ‘smart’ cities, however, will essentially hinge on their ability to improve their own revenue, raise local finance and attract greater private investment. 

Pune Municipal Corporation will be raising funds for water supply. The plan is to revamp the network to ensure 24-hour and equitable supply. The project cost is estimated at Rs 3,513 crore.

Conditions

Earlier this year, the Securities and Exchange Board of India (Sebi) had allowed municipalities having a revenue surplus in their books in any of three preceding financial years to issue such securities. Either this measure or the one it issued in 2015 must be satisfied, that a municipality making a public issue of debt securities should not have had a negative net worth in any of three immediately preceding financial years.

Also, Sebi has said, a municipality should not have defaulted in repayment of debt securities or loans from banks or financial institutions during the past 365 days.

Background

Municipal bonds are still a fledgling area in India. In 1996, the Rakesh Mohan committee on ‘Commercialisation of infrastructure projects’ recommended a market in this regard be developed. 

The civic body in Bengaluru had raised Rs 25 crore through a private placement in 1997, backed by the state government. Ahmedabad Municipal Corporation (AMC) issued its first bond in 1998, without a state government guarantee, raising Rs 100 crore. Both these bonds were taxable.

In 2000-01, the central government gave tax exemption to interest income from certain municipal bonds. The proceeds were to be used for developing of infrastructure for supply of potable water, sewerage or sanitation, drainage, solid waste management, roads, bridges and flyovers, or urban transport.

The first tax-free municipal bond was issued in 2002 by the AMC, to raise Rs 100 crore for water supply and sewerage. However, in the past 20 years, urban local bodies have been able to raise only Rs 1,094 crore through municipal bonds.