Municipal bonds: FinMin asks urban development ministry to identify cities

Specific projects in 5-6 cities are to be identified for issuance of these bonds

Days after the Securities and Exchange Board of India (Sebi) proposed new rules for issuance of municipal bonds, the finance ministry has asked its urban development counterpart to identify five or six cities, and specific infrastructure projects in those cities, for which those civic bodies could issue such bonds.

Municipal bonds are instruments issued by municipal bodies, or by states on these bodies’ behalf, to raise capital for infrastructure projects. After Finance Minister Arun Jaitley in the Union Budget for 2014-15 announced the intention to develop 100 smart cities, the government deliberated on various ways to finance the infrastructure for such cities and decided reviving the dormant municipal bonds could be one of the ways.

“The urban development ministry has been asked to identify five to six cities and specific projects within these cities for which the municipal bonds will be issued. This will only be the start. There will be more cities identified for infrastructure funding, to develop those into smart cities,” a senior government official told Business Standard.

According to the plan, these will be Tier-II and -III cities and include smaller state capitals and satellite towns around larger metros. The official added the urban development ministry was expected to come up with specific names within a week.

On December 30, Sebi had released a concept paper on the issue and trading of such bonds on exchanges and invited comments from the public. The concept paper said the civic body issuing these bonds would have to obtain ratings from credit rating agencies and would have a minimum tenure of three years.

The market for municipal bonds has existed in India since 1998, when Ahmedabad became the country’s first city to issue such bonds. But 25 municipal bond issues in the past 16 years have garnered only about $300 million, according a report by Mukul Asher, professor at the National University of Singapore, and Shahana Sheikh of New Delhi’s Centre for Policy Research. The amount raised so far is only a fraction of those raised by developed markets like the US, where the municipal bond market is worth more than $3 trillion.

Analysts and policy watchers say the market for such bonds has not picked up in India for a number of reasons. These include the lack of interest among investors, the sorry state of finances at many municipal bodies, shoddy accounting of their books, bureaucratic hurdles, lack of interest at the central and state levels, and the issue of who will guarantee these bonds. Besides, there also is local political interference in these civic bodies.