Sebi seeks relaxed rules for municipal bodies eyeing bond market

Mumbai: The capital markets regulator has approached the government to allow municipal corporations and municipalities to access the bond market through pooled finance, two people aware of the development said.

Many civic bodies do not sell bonds because lower-rated securities have few takers. In pooled finance, several civic bodies jointly float a trust, which issues the bonds.

Investors are seen as more open to buying bonds which can be serviced by different revenue streams. Trusts are currently not allowed to sell bonds.

The Securities and Exchange Board of India (Sebi) was previously considering a proposal to allow small municipal bodies to come together.

“The feedback Sebi gathered is that good-rated municipalities are not willing to be pooled with low-rated ones. It has also given a feedback to government on giving tax incentives for municipal bonds to work, but there was no announcement to that effect in the budget. The bond market will have to wait for the next budget for this,” said the first of the two persons cited earlier.

The process is likely to be time-consuming, further delaying the growth of the market.

In March, ratings of 94 cities, which are part of Smart City Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), were detailed by the ministry of housing and urban affairs. Of these, 55 cities got investment grade rating (BBB- and above), while other 39 were rated below BBB-.

“Pooled mechanism can help lower rated urban local bodies to come together and issue bonds. Investors can take comfort from the fact that there is diversification of revenue sources to service debt. This mechanism was also used in 2003 in Tamil Nadu,” said Subodh Rai, senior director at Crisil Ratings.

Last month, Greater Hyderabad Municipal Corporation (GHMC) raised Rs200 crore by selling municipal bonds. The bonds, rated AA, were priced at a coupon of 8.90%, which will be paid twice in a year.

This was followed by a similar issuance by Pune Municipal Corporation (PMC) in June 2017. The civic body raised Rs200 crore, marking the comeback of municipal bonds after at least 14 years. PMC’s bonds were rated AA+.

At least five other civic bodies with investment grade ratings are in discussions to sell municipal bonds worth Rs1,000 crore in the next six months, according to bond dealers who requested not to be named.

“Structuring of bonds by securitizing revenues through an escrow mechanism can help ‘A’-rated ULBs (urban local bodies) get a credit enhancement and access to the capital market. For instance, property tax collections could be securitized and kept in an escrow account. Bond holders will have first right on the escrow account as far as debt servicing is concerned,” said Crisil’s Rai. 

The rating agency expects Rs6,000 crore of municipal bond issuances over next three fiscals.