New Delhi: In a move that will help raise funds for infrastructure projects and the government's smart cities initiative, regulator Sebi today approved new norms for issuance and listing of municipal bonds on stock exchanges.
These bonds can be issued by the municipal authorities to the public and institutional investors, including sovereign wealth funds and pension funds from abroad, and help raise funds for urban development, Sebi Chairman U K Sinha said.
The guidelines for issuance and listing of these securities, which are very popular in the US and other Western markets and are commonly known as Muni Bonds, were approved by Sebi's board today and the final norms would be notified in the next 6-8 weeks.
The new norms would come with adequate safeguards and would provide for disclosure requirements to be made by the prospective issuers.
Talking to reporters after its board meeting, Sinha said the various safeguards to protect the interest of investors, putting their money in municipal bonds, include the need for having investment grade credit rating.
Besides there would be a monitoring agency -- which would be banks or financial institutions -- to keep a tab on the performance of these securities in the market.
The issuer's contribution for each project should be at least 20 percent of the project costs, which would be from their internal resources or grants.
The bonds would need to have a minimum tenure of three years and the issuers should not have defaulted on their repayment obligations in the last one year.
Noting that the decision also takes into account the government's plan of setting up 100 smart cities, Sinha said the issuance of municipal bonds would be based on a "project-oriented approach".
These norms are also in line with the government's guidelines for issue of tax-free bonds by municipalities.
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.
In the US, 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.
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 were provisions as yet for listing and subsequent trading of muni bonds on stock exchanges in India.
According to Sinha, the new norms for municipal bonds would help attract large institutional investors.
Large institutional investors like pension funds, insurance companies and foreign pension funds, "who are at the moment little shy in making investments will get the desired comfort," he said.
Municipal bodies can raise money from the public only through "what is called the revenue bond".
"It means that they cannot have a negative net worth, must not be a defaulter in their past borrowings," he added.
Citing that urban population is estimated to cross 68 crore by 2020, the Sebi chief said then the urban infrastructure is seriously in need of regeneration.
"In order to help that there is a need for municipal bond markets to develop and all over the developed world, this market is in existence... Going by the requirements of Indian economy and policy requirements, it will be a good step," he said.
Among others, the municipality, issuing such bonds, should not have had negative net worth in any of the last three preceding financial years.
As per Sebi, banks or financial institutions would be appointed as monetary agencies.
In case of private placements, an issuer may issue general obligation bonds or revenue bonds.
For municipal bonds issuance, the Sebi board today approved Sebi (Issue and Listing of Debt Securities by Municipality) Regulations, 2015.
"We feel that it now paves the way for regulatory infrastructure or architecture for municipalities to raise money and for institutional investors like pension funds and insurance companies to invest in this new class of assets," Sinha added.
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.
The revenue from the project, for which bonds have been issued, would be kept in a separate escrow account in order to assure the public, he said.
"The revenue stream will be credited to an escrow account and there will also be a monitoring agency and it will be informing the public and the investors from time to time that how bonds' revenues are coming and how they are being serviced," Sinha said.
