Sinha for flexi-pricing of municipal bonds

Calling for flexible pricing of municipal bonds to deepen this nascent market, market watchdog Sebi today asked urban bodies to upgrade their services and charges as well as adopt modern accounting practices to secure better credit ratings.
"There is price ceiling of 8 percent now...Some flexibility can be brought in this such as linking it with 10-year government security yields," Sebi Chairman Upendra Kumar Sinha told a summit on municipal bonds organised by the regulator here.
The Sebi chief also said he would be taking up this matter with the government so that municipalities can better tap the capital markets to part meet their capex bills, which according to some studies will be to the tune of Rs 40 trillion over the next two decades.

Sinha added he would prefer sectoral regulators and agencies such as pension funds and mutual funds to invest in municipal bonds.
Asking urban bodies to do away with obsolete accounting practices and adopt new mechanisms to improve their credit ratings, Sinha said Sebi will be looking into any issues and suggestions concerning credit rating of municipal bonds.
"One feedback is on account keeping of municipal bodies...It is high time we move away from the obsolete accounting system which municipalities follow, and (they) need to adopt latest modern investor-friendly accounting norms," the Sebi chief said.

Sinha further said if local bodies do not have the right accounting practice, it will effect the rating and they will not be able to issue bonds.

"Sebi is trying to sensitise people on the issue. If credit rating improves, they would be able to raise funds," Sinha added.
Urging urban civic bodies to offer better services and also price them higher, Sinha noted that "earlier payment for municipal services was resisted as the people did not find them of good quality and did not want to be over-charged...But today people don't mind paying if the services are good."
He also warned that "municipal bonds will not succeed if people resist paying for services".
Addressing the gathering, Union Urban Development Secretary Rajiv Gauba called upon municipalities to tap the capital markets to meet their funding needs.

"Municipal bonds have tremendous potential but till now it has been used only sparingly," Gauba said.
Sinha added, "Our cities are looking for different sources
of funds and this source of funding is getting lot of attention and we are helping municipal corporations to get credit ratings as well as improve credit ratings.
"There are 100 cities shortlisted from 500 cities under the Amrut Project (which) need credit ratings and some of them are in advanced stages of this process, while some have completed the process."
Accordingly, Sinha noted it is essential for municipalities to garner funds from new sources such as bonds for development of urban regions.

The Sebi chairman also admitted that the market is not developing as per its potential as participants are looking for the secondary market to develop first, which he described as a "chicken-and-egg situation".
"We should not wait for these things to happen...Unless there is a certain size secondary market cannot develop... it's a chicken-and-egg situation..If we wait for secondary markets to deepen, we will have to wait for very long of time," he said.
Gauba said a recent government panel report had pegged the funding needs for urban development at Rs 40 trillion over the next 20 years and an additional Rs 30 trillion for operations and maintenance of infrastructure.

Sinha also said the norms for municipal bonds provide clear-cut guidelines and hoped such bonds will get listed.
"Sebi has tried to focus on the clarity of the disclosure process and safeguards for investors have been laid out under these norms," he said.
To help the government's 'smart cities' programme, the capital markets watchdog notified a new set of norms for listing and trading of municipal bonds on stock exchanges in July last year.
The municipal bonds would allow authorities to mop-up funds, including for setting up smart cities, by raising money from the public and institutional investors.