After approving the regulations for such municipal bonds, also known as 'muni bonds', Sebi Chairman U K Sinha said this would allow authorities to raise funds including for setting up of smart cities, by raising funds from the public and from the institutional investors.
These municipal authorities would need to have a strong financial track record and such bonds would be listed on the stock exchanges, Sinha said after a meeting of Sebi's board that earlier was addressed by Finance Minister Arun Jaitley.
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Conservative Indian investors mostly invest in fixed deposits, small saving schemes or gold. Bonds issued by municipalities having good financial track record would be another alternative investment opportunity for them.
Such bonds would provide reasonable return with less risk, which in turn may accelerate the capital markets.
Commonly known as 'muni bonds', these investment products are very popular among investors in many developed nations, especially the United States, where muni bonds have attracted investments totalling over USD 500 billion and are among preferred avenues for household savings.
In December last year, Sebi had floated draft norms for 'Issue and Listing of Debt Securities by Municipality' and had sought public comments till January 30.
Sinha said municipal bonds would add to instruments where provident funds, pension funds and insurance companies can put in their money.
While such bonds have been issued by various municipal authorities in the country, the total funds raised through them stand at only about Rs 1,353 crore.
The Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs 125 crore with a state guarantee in 1997.
However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without state government guarantee for financing infrastructure projects in the city. AMC raised Rs 100 crore through its public issue.
Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds. However, there is no provision as yet for listing and subsequent trading of muni bonds on stock exchanges in India.
As per guidelines of the Urban Development Ministry, only bonds carrying interest rate up to maximum 8 per cent per annum shall be eligible for being notified as tax-free bonds.
Sebi's Corporate Bonds and Securitisation Advisory Committee was of the view that having a fixed rate of 8 per cent might not attract investors.
Under the proposed norms, municipal authorities having negative net worth and those which have defaulted on payments to financial institutions would be barred from issuing the bonds.
Corporate municipal entity or its directors restrained or prohibited by Sebi would also be ineligible.