Plans afoot to spur municipal bonds market

A decade after the launch of first municipal bonds in India by Ahmedabad Municipal Corporation "" its Rs 1 billion bonds in January 1998 were also the first muni-bonds in Asia to be rated "" policymakers and industry experts today pledged more steps to activate this illiquid instrument and clear the roadblocks, if any, for retail investors, mutual funds and insurance companies to participate in this market.

A total of 13 municipalities have raised Rs 7.3 billion ($0.18 million) in the Indian bonds market, constituting a minuscule 0.1 per cent. On the other hand, muni-bonds constitute 12 per cent of the non-government stock outstanding in the US.

Liquidity constraints, rules prohibiting the participation of insurance companies, lack of incentives for retail investors and mutual funds have affected the development of the muni-bond market.

In the United States, 38 per cent of the household income and 37 per cent of the mutual fund assets are invested in muni-bonds. "These two segments are practically untapped in India," said Roopa Kudva, managing director of Crisil, which assigned 'A+' grading to AMC's bonds.

"All the bonds in India are issued by financial sector entities. Municipal bonds offer a good diversification for the investors," Kudva said.

She was speaking at the day-long conference on 'Developing India's Municipal Bond Market', organised by US Agency for International Development (USAID), National Institute of Securities Market and Crisil.

The concept of owning one's city, or being a part of the city's development may attract investors from the city concerned to invest in muni-bonds.

Seven cities - Ahmedabad, Nasik, Nagpur, Ludhiana, Madurai, Bangalore and Kanpur - have raised funds through taxable muni-bonds. The proceeds of municipal bonds were used for water and sewerage schemes, in most cases.

Ahmedabad was the first city to issue tax-free bonds. Hyderabad, Vizag and Nasik have also issued tax-free bonds. The annual interest rates of tax-free municipal bonds are 1.5 to 2 per cent lower compared with other bonds of the same quality.

Eight cities, including Chennai, Jaipur, Thane and Kolkota secured ratings for their bonds, ranging from a low of 'BBB+ to a high of AA+'.

With pension sector reforms likely to move at a faster pace following the setting up of Pension Fund Regulatory and Development Authority (PFRDA), more funds would be available for long-term paper, Kudva said.

Another reason for investor apathy towards muni-bonds is the poor perception about governance.

Chairman of Securities and Exchange Board of India (Sebi) M Damodaran has promised all support for the muni-bonds market. As municipalities require money for their development programmes, they should be allowed to collect funds through flexible instruments, he said.

Walter Kulakowski, global capital markets, Citigroup, said that muni-bonds constitute the fourth largest debt instruments in the US after mortgages, government securities and corporate bonds.