Govt may raise interest subvention cap beyond ₹26 cr to promote muni bonds

In a bid to promote issuance of municipal bonds, the government is considering a proposal to hike interest subvention from the present Rs 26 crore per urban local body (ULB).

Considering immense scope for expansion of municipal bond markets in a bid to develop world class urban infrastructure, there is a need to increase the ceiling of interest subvention from existing Rs 26 crore per urban local body, sources said.

The interest subvention is provided to municipal bodies under Atal Mission for Rejuvenation and Urban Transformation (AMRUT) to make such municipal bonds or muni bonds more attractive. The Rs 26 crore is the maximum interest subvention an ULB can receive from the Ministry of Housing and Urban Affairs (MoHUA) for issuing municipal bonds.

The central government has extended the facility of 2 per cent interest subvention on such bond issues in order to incentivise this market and facilitate participation of more civic bodies. This interest subvention is on the total size of the bond issue by an ULB.

For their first bond issuance, ULBs can receive incentives of up to Rs 13 crore for every Rs 100 crore raised, with a maximum cap of Rs 26 crore under the AMRUT 2.0.

For subsequent bond issuances, the bonds must be categorised as green bonds, focusing on sectors like water, sanitation, renewable energy, or urban resilience. In such cases, ULBs would be eligible for incentives of Rs 10 crore per Rs 100 crore raised, capped at Rs 20 crore.

Bengaluru was the first to come out with municipal bonds as early as 1997. After that, some more ULBs such as Nashik, Greater Hyderabad Municipal Corporation and Ahmedabad hit the bond market.

Despite SEBI issuing comprehensive guidelines for Urban Local Bodies (ULBs) to raise funds via municipal bonds a decade ago, progress has been limited.

Various central and state government initiatives, such as AMRUT and the Smart Cities Mission, aimed at improving municipal infrastructure and encouraging ULBs to tap the capital market, have yet to yield significant results in mobilizing funds through municipal bonds.

Agencies including merchant bankers, brokers and rating agencies may be empanelled by National Bank for Financing Infrastructure and Development (NaBFID) to provide expertise and guidance to municipal corporations to help them develop and issue municipal bonds, sources said.

NaBFID as the development finance institution can assist with statutory paperwork and compliance with Sebi's listing requirements, marketing /book building/road shows etc, sources added.

In order to promote muni bonds, capital market regulator Sebi last year reduced the face value of bonds to Rs 10,000 from Rs 1 lakh to boost retail participation.

Sebi plans to facilitate the settlement and clearing of municipal bonds through AMC Repo Clearing (ARCL) to encourage greater participation and increase volumes.