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Business News/ Market / Stock-market-news/  Indian municipal debt faces steep learning curve as Mumbai frets
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Indian municipal debt faces steep learning curve as Mumbai frets

The sale and listing of notes by municipalities was approved by Sebi last month, allowing them to issue bonds to fund urbanization projects

Sebi’s ruling published 22 March stipulated that municipalities shouldn’t have had negative net worth in any of the three financial years preceding a bond sale and that public offerings can only be made if the issue is investment grade. Photo: MintPremium
Sebi’s ruling published 22 March stipulated that municipalities shouldn’t have had negative net worth in any of the three financial years preceding a bond sale and that public offerings can only be made if the issue is investment grade. Photo: Mint

Mumbai: Indian market regulators’ plans for a municipal bond market have been met with doubts, not just from ratings companies but potential issuers themselves.

The sale and listing of notes by municipalities was approved by the Securities and Exchange Board of India (Sebi) last month, allowing them to issue bonds to fund urbanization projects such as roads and sewers. The Municipal Corporation of Greater Mumbai hasn’t considered an offering and sees the need for regional authorities to become more efficient before tapping the market, according to commissioner Sitaram Kunte.

“At the moment we rely on government support and I think it will stay this way for sometime," Kunte said by telephone 7 April. “Our staff will need a lot of learning to understand the dynamics and we can learn a lot from countries where municipal bonds are used."

India’s economy needs to find some 3.87 trillion to upgrade urban infrastructure, according to India’s 12th five-year plan. Government bureaucracy and inefficiency has stymied progress so far. The second phase of Mumbai’s urban transport network, scheduled to be completed in March 2014, has been delayed by five years and a port terminal in the city pushed back to 2016 from 2012.

‘Efficient and cheapest’

“Data disclosure and long-term policy road maps are a few issues that municipalities have to address to increase investor appetite," Devendra Kumar Pant, chief economist at Fitch Ratings Ltd’s local unit, India Ratings and Research Ltd, said in a phone interview 8 April. “All Indian cities need money to finance urban infrastructure projects and bonds are the most efficient and cheapest way."

The working group on financing urbanization estimates a capital expenditure requirements of 2.88 trillion for India’s urban transport and about 99,100 crore for water supply, sewerage, solid waste and storm water drains between 2012 and 2017. Delayed road and power projects are prompting Srei Infrastructure Finance Ltd to scout for distressed investment opportunities.

Sebi’s ruling published 22 March stipulated that municipalities shouldn’t have had negative net worth in any of the three financial years preceding a bond sale and that public offerings can only be made if the issue is investment grade.

Enhancement mechanisms

Local authorities also need to contribute a minimum of 20% toward each project from internal resources and will be assigned monetary agencies that will, inter-alia, prepare periodic reports. Sebi will shortly issue more detailed rules for municipal bond sales, chairman U.K. Sinha said 30 March.

“Given the high credit quality expectations of investors in the bond market, there’s a need for innovative credit enhancement mechanisms to enable municipal corporations" to sell debt, Pawan Agrawal, Mumbai-based chief analytical officer at Crisil Ratings Ltd, the local unit of Standard and Poor’s, said. Local bodies need to first enhance the transparency and timeliness of their finances, and identify financially viable projects able to repay obligations, he said.

Two credit enhancement mechanisms local municipalities could consider might be the escrow of future property tax collections and pooled municipal finance structures, Agrawal said. Crisil expects civic bodies will increasingly have to tap the bond market because funding growing urban services from their own revenue will be difficult.

Rating outlook

India’s debt rating outlook was raised to positive from stable by Moody’s Investors Service Thursday, recognizing the efforts of Prime Minister Narendra Modi and Reserve Bank of India (RBI) Raghuram Rajan to improve the economy. The country’s Baa3 rating was affirmed.

Top-rated five-year corporate notes in India pay an average 8.4%, down from 8.7% at the start of the year. Ten-year government bond yields have fallen 8 basis points since 31 December to 7.78%. The rupee has strengthened 1.3% against the greenback over the period, making it Asia’s best- performing currency after the Taiwanese dollar.

Authorities in China are moving down a similar path, saying last month that regional financing vehicles will be allowed to convert some high-yielding debt into municipal bonds, according to a statement on the finance ministry’s website. China is seeking to rein in local government borrowing that swelled to 17.9 trillion yuan ($2.9 trillion) as of June 2013, according to the National Audit Office.

In India, the guidelines will “allow a new class of issuers to tap the corporate bond market, and gradually build an investor base," Ajay Manglunia, the head of fixed-income markets at Edelweiss Financial Services Ltd in Mumbai, said. “I don’t expect municipal bonds to be a game changer." Bloomberg

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Published: 10 Apr 2015, 01:25 PM IST
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