Bankers squabble over municipal bond mandates

Under the Smart Cities Mission, municipal bodies would issue bonds to raise money

Pune Municipal Corporation is all set to become the first issuer of municipal bonds under the government’s Smart Cities Mission. But even before the first of its kind instrument hits the market, the product has already become a hotly contested one among advisors and merchant bankers. 

According to sources, Pune would likely invite bids for Rs 200 crore worth of bond issuance by June 27, while a few others should start issuing such bonds in the next two-three months, upon getting clearances from various authorities.

Four municipal bodies with high credit ratings are in advanced stages of issuing the bonds. Apart from Pune (rated AA+), New Delhi Municipal Council or NDMC (AA+), Ahmedabad (AA) and Greater Hyderabad (AA) are in advanced stages to issue such bonds. 

The government expects the local bodies to raise Rs 6,000-10,000 crore from the market in the next two years through these bonds. Considering the ratings of some of the local bodies, these should be in heavy demand among the investors, but secondary market activity would still be some years away considering the lack of enough liquidity.

To provide these local bodies technical assistance in issuing municipal bonds for smart city projects, the urban development ministry had empanelled nine transaction advisory firms. Except State Bank of India’s (SBI’s) merchant banking arm SBI Capital Markets, all the other eight firms are from the private sector. SBI Capital Markets or SBI Caps is linked with the government through its ownership of SBI. 

The top municipalities, in their quest to avoid controversies giving mandates to private parties, are largely offering merchant banking mandates to SBI Caps, leaving out all others.

The original idea was that these nine members would bid for the advisory part and would receive fees for the technical assistance given. After that, when the time of issuance of the bonds comes, there would be another bidding for merchant banking activities. Here the underwriter who offers the lowest coupon should be given the mandate for merchant banking. 

In the case of Pune and Hyderabad, request for proposals (RFPs) were floated and sent to all advisors. The bids were done for advisory-cum-merchant banking mandate. And SBI Caps bagged both mandates. In case of NDMC and Ahmedabad, the mandates were given by nomination to SBI Caps. 

“Since Pune and Ahmedabad had already given the mandate to SBI Caps, we gave them too. We wanted to keep things simple,” said a senior NDMC official, requesting anonymity. 

Other municipalities could also follow suit, fear SBI’s competitors. They complained to the government that SBI Caps was getting all the mandates. But SBI Caps says it followed due process. “Both Pune and Hyderabad had invited bids through the RFP route and we believe RFP was sent to all the merchant bankers empanelled with Ministry of Urban Development. The scope of services under RFP was decided by the respective municipal corporations. We do not see how a competitive process where all empanelled merchant bankers have been invited can be considered to have benefited SBI Caps only,” said a spokesperson. 

The main contention of the competitors is that bidding for advisory is fine, but the merchant banking mandate is decided after going through a coupon bidding process. Whoever offers the lowest coupon should get the merchant banking mandate. If a merchant banker is appointed before going through the coupon bidding process, other merchant bankers can be completely left out of the bidding process. At the time of the bidding process, the issuer and the advisor decide who can bid for the coupons.

Unlike qualified institutional buyers (QIBs) merchant bankers cannot bid directly in the online auction but do so on behalf of their clients. In case there is only one merchant banker bidding, the lack of competition could mean lucrative rates for that merchant banker’s clients. The issuer, on the other hand, could suffer as it would have to pay higher coupon. Multiple bidding helps in effective price discovery.

To address this, the urban development ministry, on May 18, brought out an advisory stating there should be a transparent bidding process for coupon discovery. 

The Smart Cities Mission advisory said after identification of the project(s) to be funded through municipal bonds, the transaction advisor will prepare a term sheet clearly defining the financing structure of the project, tenor and minimum commitment amount. 

“The bids for the merchant banker can be invited from all the merchant bankers accredited with Sebi or selected merchant bankers based on a sorting process as per the requirement to be decided by the cities,” the advisory says. 

A senior official at the ministry of urban development told Business Standard it would be ideal if the cities were to call for multiple bidding. “But it is still left to the local bodies to decide how they want to go about it,” he said.  

However, the municipal bodies may have their own compulsion. According to several officials Business Standard interacted with, the local bodies are afraid that the mandates, if given to private sector merchant bankers, were susceptible to allegations of corruption for no reason. And therefore, the local bodies wanted to play it safe with their first mandates. The ministry official said the government was aware of this fear and was telling corporation officials that they needn’t worry on this front as it was a panel shortlisted by the government.