To help in the Government’s ‘smart cities’ programme, the Securities and Exchange Board of India (SEBI), on Tuesday, proposed a new set of norms for listing and trading of municipal bonds on stock exchanges, while channelising household investments for urban infrastructure development.
Issuing draft regulations for such municipal bonds, also known as ‘muni bonds’, SEBI said that that issuing authorities would need to contribute at least 20 per cent of the total project cost for which they wish to raise funds.
Besides, these municipal authorities would need to have a strong financial track record and such bonds should have a minimum tenure of three years.
“Conservative Indian investor mainly invests in fixed deposits, small saving schemes or gold. Bonds issued by municipalities having good financial track record would be an good alternative investment opportunity for such conservative investors, as it provides reasonable return with less risk, which in turn may accelerate the capital markets,” SEBI said.
Popular in U.S. ‘Muni bonds’ are very popular among investors in many developed nations, especially in the U.S., where these have attracted investments totalling over $500 billion and are among preferred avenues for household savings.
Comments have been invited on the draft regulations till January 30.
Further, the capital market regulator said that 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. However, SEBI’s Corporate Bonds and Securitisation Advisory Committee is of the view that having a fixed rate of 8 per cent might not attract investors.
There can be “flexibility in setting interest rate cap by linking it to a benchmark market rate,” the concept paper said. 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.
Minimum subscription limit According to draft regulations, the minimum subscription limit should not be less than 75 per cent of the issue size.
In the event of non-receipt of minimum subscription, all application money received in the public issue should be refunded to the applicants, within 12 days from the date of the closure of the issue.
When there is a delay by the issuer in making the refund, then it has to give back the subscription amount along with interest at 10 per cent rate per annum for the delayed period.
Further, SEBI said the issuer’s contribution for each project should be at least 20 per cent of the project costs, which shall be contributed from their internal resources or grants.
“An issuer, proposing to issue debt securities shall maintain 100 per cent asset cover sufficient to discharge the principal amount at all times for the debt securities issued,” it added.
There is massive capital investment need in municipal infrastructure and funds from programmes such as Jawaharlal Nehru National Urban Renewal Mission (JNNURM) can only partly meet the requirement, it said.
“Therefore, to meet their financing needs, the municipalities have to seek recourse to other means including issuance of municipal bonds,” the paper said.
