Municipal bonds of Indian cities
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This June, Pune Municipal Corporation raised Rs200 crore by issuing 10-year municipal bonds. The money raised from the bonds will go towards infrastructure projects for the city. Next in line are municipal bonds for New Delhi and Ahmedabad.
What is it?
Like any other bond, municipal bonds are debt instruments—a promise to repay a fixed principal amount with interest periodically, which can be paid at fixed intervals or at the end of the tenure, with the principal. For instance, the coupon rate for Pune municipal bonds was 7.50% semi-annual. In the case of the Pune municipal bonds, the money collected will be used to provide uninterrupted municipal water supply in the city.
The municipal bonds that are set to be seen in the market, will be used for the government’s smart cities project. The project aims to improve 100 cities, by the year 2020, in terms of facilities such as water supply and transportation.
Typically, municipal bonds have a tenure of more than 5-7 years.
As of now, no special tax status has been given to these bonds. However, the market has argued that they should be given tax-free status.
Like all other bonds, municipal bonds are also issued credit ratings. A credit rating indicates the bond’s investment worthiness. In May this year, 94 cities in 14 states of India received credit ratings from rating agencies such as Crisil; as part of the cities’ preparations for issuing municipal bonds. The ratings range from AAA to D.
These are for cities that are part of the Smart City Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT). The purpose of AMRUT plan is to: ensure that every household has access to a tap with assured supply of water, and a sewerage connection; increase the amenity value of cities by developing greenery and well-maintained open spaces; and reduce pollution by switching to public transport or constructing facilities for non-motorized transport. According to a statement by the urban development ministry, the credit rating is assigned based on assets and liabilities of urban local bodies (ULBs) or municipalities, revenue streams, resources available for capital investments, and other governance practices. Out of the 94 cities, 55 received investment-grade ratings and the others were below investment grade. City ratings are the same as bond ratings.
Retail investors cannot invest in municipal bonds for now. Most mutual fund houses are also staying clear of these, at least for the first few issues because the bonds are still new in the market. The expectation is that when markets eventually pick up, they will start buying. However, you can buy these bonds once they hit the secondary market. Basically, these are rupee bonds—or non-convertible debentures—issued by Indian municipal bodies.
Unlike in the US, India has not seen much success with municipal bonds. According to think tank Pahle India Foundation, only 1% of urban bodies’ requirements are funded by municipal bonds in India, compared with around 10% in the US. Eventually you can expect municipal bonds to be opened to retail investors.