The Securities and Exchange Board of India (Sebi) had issued its Issue and Listing of Debt Securities by Municipalites (ILDM) Regulations nearly five years ago and since then seven municipalities have raised nearly ₹1,400 crore by issuing their debt securities, which are commonly known as 'Muni Bonds'.
Officials said that the regulator is now proposing to allow this route for a larger number of entities including special purpose vehicles set up under the central government's ambitious 'Smart Cities Mission'.
The proposed norms would be presented for Sebi's board approval at a meeting scheduled later this month, the officials added.
After representations from the industry and market participants for amending its ILDM Regulations to expand this market segment, Sebi had initiated a public consultation process in June proposing certain amendments to these norms.
After taking into account the feedback, the regulator has now decided to amend the regulations to provide a greater flexibility in fund raising and for strengthening the investor protection.
Under the current regulations, this fund-raising route is only available to the issuers defined as a municipality under the relevant articles of the Constitution of India or the corporate municipal entities set up as a subsidiary of a municipality for the purpose of raising funds for a specific municipality or a group of those.
Sebi is now proposing to allow issuance of 'Muni Bonds' also by other entities such as entities or bodies like urban development authorities and city planning agencies that perform functions similar to a municipality such as planning and execution of urban development projects.
Since such entities are not defined as a municipality under the Constitution, they have not been able to raise funds from the market through Muni Bonds so far.
Besides, Sebi also plans to allow this route for other structures where a group of municipalities pool their resources together to jointly raise funds through issuance of bonds. These structures are generally known as Pooled Finance Development Funds.
In addition, the regulations would also be amended to allow fund-raising through Muni Bonds by special purpose vehicles set up for implementing the smart city projects.
Under the government's smart city initiative, SPVs have been set up at city level in form of a limited company under the Companies Act for implementing the projects. These companies are promoted by the state government or union territory and the urban local body of the area.
These SPVs undertake functions like ensuring adequate water supply, sanitation, sustainable and inclusive development of cities etc, thus performing tasks similar to that of municipalities.
The regulator is now proposing that any entity incorporated under the Companies Act, or any statutory body or board, authority, trust or agency established nor notified by an Act of Parliament or an Act of the State Legislature or any SPC notified by the state or central government or any structure set by a state government under the Pooled Finance Development Fund would be eligible to issue Muni Bonds, provided they undertake one or more functions of a municipality.
Sebi is also proposing changes relating to accounting, auditing and disclosure of financial statements to take into account the expanded list of eligible entities and the requirements of such entities to get their accounts audited by the Comptroller and Auditor General of India (CAG) and approved by various authorities.
Besides, Sebi plans to relax norms relating to creation of escrow accounts and do away with requirements for appointing a monitoring agency and establishing a separate project implementation cell.
Also, the existing regulations allow issuance of only revenue bonds with a minimum tenure of three years and maximum five years, if it is a public issue. This clause has been proposed to be dropped.
In case of private placement, the minimum subscription amount per investor is currently ₹25 lakh, which is being proposed to be reduced to ₹10 lakh to align it with the regulations for corporate bonds.
In another proposal, a private placement offer can be made to up to 200 persons in one financial year, but this limit would not apply to an invitation to qualified institutional investor.
Besides, the filing of draft offer and the final offer document with Sebi have been proposed for private placements as well, in addition to public issues.