Sebi proposes overhaul of municipal bond rules to deepen urban infrastructure financing market

India’s market regulator has proposed a revamp of municipal bond regulations aimed at making it easier for urban bodies to raise debt while tightening disclosure and investor protection norms.

Pooled bond issuances by multiple municipalities, stricter rules on use of proceeds, enhanced refinancing disclosures and measures to boost retail participation are among the suggestions the Securities and Exchange Board of India (Sebi) made in a consultation paper issued on Wednesday.

The move comes as India’s rapid urbanization increases pressure on local governments to fund roads, sewage systems, transport networks and water infrastructure. Sebi said municipal corporations require a “quantum rise” in spending to meet urban infrastructure demand and should rely more on stable, self-generated financing sources instead of depending heavily on state and central government grants.

Sebi recommended allowing two or more municipalities to raise money collectively through a pooled finance vehicle or special purpose vehicle (SPV). This would help smaller municipalities, which often struggle to independently access debt markets due to weaker financial profiles or limited scale.

Municipalities would enter into agreements with the SPV before the fundraising, while the pooled entity would maintain dedicated escrow, interest payment and sinking fund accounts to safeguard investor repayments.

“The proposals are likely to significantly improve municipal participation by enhancing flexibility, reducing costs, and aligning with market standards - although actual uptake will still depend on municipal financial strength and governance,” said Manisha Shroff, partner at Khaitan & Co.

“A lower face value will improve retail participation and liquidity, but sustained demand will depend on parallel improvements in credit quality, transparency, and market awareness. Smaller lot sizes also enhance secondary market activity and price discovery,” she added.

Sebi proposed additional credit enhancement measures such as cash collateral, state government support and guarantees from development finance institutions or multilateral agencies. The regulator said the SPV would need a separate credit rating, while rating companies would assess the financial position of each participating municipality in the pool.

In another key proposal, Sebi suggested lowering the face value of privately placed municipal bonds to as little as ₹10,000 or ₹100,000, as deemed fit. This is expected to encourage greater retail participation in municipal debt securities.

The regulator also proposed allowing municipalities to issue bonds tied to environmental and social projects and allowing issuers to provide incentives such as discounts or additional interest to attract retail participation.

Detailed disclosures

When issuing bonds to refinance debt, municipalities could be asked to provide more detailed disclosures such as the type of old loans, lender details, interest rates, repayment schedules and any restructuring. Such disclosures would help investors better assess the financial health and liquidity risks associated with municipal issuers.

Sebi also proposed restrictions on how municipalities use bond proceeds. It suggested that not more than 25% of an issue’s proceeds can be used for working capital requirements related to the underlying project. Issuers would have to disclose the proportion of proceeds allocated toward working capital.

Municipal bonds remain a small segment of India’s debt market despite a regulatory framework introduced in 2015. As of March 2026, only 22 municipal corporations had raised a cumulative ₹4,540 crore through 31 bond issuances, the regulator said in the paper.

Public comments on the consultation paper have been invited till 3 June.