Municipal bond fund-raising trebles in 5 years; over Rs 6,000 cr mopped up

The total amount that municipal corporations have raised through the bond market has trebled since 2017. The latest regulatory filings of the Indore Municipal Corporation for another Rs 250 crore would mean that the total amount raised through this route will touch Rs 6,252 crore. This is 2.7x the cumulative amount of Rs 2,342 crore raised (as of 2017).

The Indian government provided financial incentives for municipal bond issuances as part of the Atal Mission for Rejuvenation and Urban Transformation (AMRUT, 2015) programme. It provides aid at the rate of Rs 13 crore for every Rs 100 crore of bonds issued under the AMRUT programme.  

The surge comes also amid regulatory recognition of the need to encourage the use of an alternative source of finance for urban bodies.

“As demand for infrastructure grows among Indian cities, municipal corporations must further explore ways to reinvigorate and foster alternative and sustainable resource mobilisation through municipal bonds. Policies to improve the environment for financial investment through sound and efficient regulation, greater transparency, and better governance can help nurture a vibrant municipal bond market. Listing municipal bonds on the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India,” said the Reserve Bank of India’s November 2022 report on municipal finances.

The Securities and Exchange Board of India (Sebi) also issued regulatory norms to allow such securities to be used for funding green projects.

“Regulations do not define ‘green debt security’… Sebi has received representations from market participants on the compliances an issuer…would have to undertake in case it is desirous of issuing a green debt security…,” noted a November 2022 circular.  

The stock market regulator then provided clarity on the definition of such securities. The Indore Municipal Corporation subsequently announced it is looking to raise Rs 250 crore through green bonds in December 2022.

India’s municipal bond issuances have not always been abundant, driven perhaps by the fact that municipal corporations have other sources of money which are cheaper for them, noted Dwijendra Srivastava, chief Investment officer (debt), Sundaram Asset Management Company. But there is a lot of global demand for instruments linked to green projects, he said of the potential for such issuances. Some demand may also be driven by the higher returns that such instruments offer, he said.

“That theme is catching up… overall yields have also gone up,” he said.

Global investors are looking at financing urban bodies through the bond market, according to the World Bank’s October 2022 Sovereign Green, Social, and Sustainability Bonds report.

“Investors also report an interest in subnational and sub-sovereign thematic bonds, which might be an option worth exploring in countries where the responsibility for urban infrastructure investments and operations is decentralised to subnational governments, including states, provinces, municipalities, cities, or districts,” it said.

The Andhra Pradesh Capital Region Development Authority issuance of Rs 2,000 crore in 2018 was the largest bond issuance of its kind. Others who have come out with issuances in recent times include the Vadodara Municipal Corporation (Rs 100 crore), Ghaziabad Nagar Nigam (Rs 150 crore), and Lucknow Municipal Corporation (Rs 200 crore).