To finance its expenditure as well as for its core development, municipalities which have limited options at the district or city level for borrowing from the market as per the SEBI notification in 2015 can raise funds through the issue of municipal bonds.
Through the issue funds can be raised from the public for funding infra development. Investors in these funds can be general public or institutional investors.
SEBI guidelines for Municipal Bonds
The earlier guidelines of the SEBI proposes to offer such bonds to general public, list and trade them on the stock exchanges. Together with substantial safeguards that risk per se municipal bonds in India is reduced.
How these bonds work?
Say a municipal body comes up with municipal bonds for a metro rail project development. Then after the project is successfully developed, revenues generated from it will be paid back to the investors as the principal and interest amount.
Generally investors in these bonds are risk averse entities such as large institutions including pension funds and insurance companies. And by issuing municipal bonds, companies can raise funds directly for infrastructural needs without looking for funds from State grants or other agencies.
History of Municipal Bonds
In the Indian context, they have been in existence since the year 1997. Many cities including Ahmedabad, Nashik, Madurai, Bengaluru had issued municipal bonds earlier and had been mainly held by private institutions and not traded.
Recent Pune Municipal Bonds Issue
After almost 14 years, Pune Municipal Corporation (PMC), the local body of Pune, issued municipal bonds in the country. PMC raised an amount equal to Rs. 200 crore for its smart city project.
The bonds offering 7.59% interest rate are rated AA+, a top most credit rating. Issue managed by SBI capital market received good respone with oversubscription of 6 times. Investors in the PMC bonds were mainly domestic insurance companies, large state-run banks and pension funds.