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Return Of The Municipal Bonds

Municipal bonds are making a comeback. Will they be successful this time around?

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When pune municipal Corporation (PMC) issued municipal bonds to fund the ambitious 24X7 water supply project on 22 June, it marked the re-entry of municipal bonds in India.

PMC is the first urban local body (ULB) to raise Rs 200 crore through selling bonds, nearly two years after Sebi issued new norms for municipal bonds. The fact that it was over-subscribed by six times (Rs 1,200 crore) has attracted many municipalities to join the bandwagon.

As India needs around Rs 39 trillion to invest in urban infrastructure over the next 20 years, both policy makers and ULBs are looking at reviving municipal bond or ‘muni bond’ market to raise money. Municipal bonds are debt instruments by which an ULB raises money from market, by paying a specified amount of interest and returns the principal amount on a specific maturity date.

Reviving The Market

The huge fund requirement for the National Smart Cities Mission has revived the prospects of municipal bond markets and the policymakers and market regulators have warmed up to the idea. They are looking at it as a potent tool to fund the city infrastructure projects beyond PPP and the government grants.

At present, 15 smart cities have already appointed transactional advisers for the same including New Delhi Municipal Corporation (NDMC), Jaipur, Jabalpur, Ahmedabad, Visakhapatnam, Indore, Kakinada, Udaipur, Bhopal, Warangal, Kota, Bhiwadi, Kishangarh, Panaji and Greater Hyderabad Municipal Corporation (GHMC). According to analysts these municipal bodies are expecting to raise fund worth Rs 50,000 crore via municipal bonds.

“We require Rs 3,300 crore for the project and expect to raise nearly Rs 2,300 crore by issuing municipal bonds. We will go in for more tranches as and when we require funds,” says Kunal Kumar, Commissioner, PMC.

According to Ministry of Housing and Urban affairs, so far, 94 cities across 14 States having received credit ratings as part of their preparations for issuing municipal bonds. And only 55 cities have received investment-grade ratings.

After Pune, next in the line is NDMC, which is responsible for providing civic amenities to country’s most powerful addresses. “NDMC is planning to raise Rs 200 crore by selling bonds, which will be used for strengthening its electricity distribution network. India Ratings & Research has assigned a provisional ‘AA+’ rating with a stable outlook for NDMC’s proposed non-convertible debentures (NCDs),” says Geetali Tare, financial advisor at the civic body.

NDMC area has limited scope of revenue growth, due to the small size and nature of properties under its jurisdiction. Hence, its financial performance largely depends on the efficiency in revenue collection and expenditure control,” credit rating agency, India Ratings & Research said. It assigned a provisional ‘AA+’ rating with a stable outlook for NDMC’s proposed NCDs. Analysts say that if nothing, it will bring in fiscal discipline for the municipalities and make them accountable and answerable for their cash flows.

Can It Be Different This Time?

The municipal bond is a very popular concept among the western countries. In the US, municipal bond market amounts to $3.7 trillion and in China $187 billion. However despite the recent success of Pune Municipal Bond, analysts say, it is premature to announce that municipal bond markets have arrived in India. Even in the past Indian cities attempted to take the bond route but the amount was too small and the success was limited to some larger municipal bodies.

Not everybody is enthusiastic. Critics argue that the indirect participation of powerful investors and financial institutions in the city’s infrastructure is undemocratic, and worry that basic civic services could turn profit-oriented. Pune has planned to increase its water charges by 12 per cent every, which will impact its citizens.

There are overlapping jurisdiction of State and the Centre, which leaves many areas unclear for he investors.

They also point to the risk for individual investors if the municipal corporation defaults on repayment, as is happening in China now. For example, in China there are now fears of default by local governments that have raked in debt totalling $2.9 trillion. In the US also Detroit became the largest US city ever to file for bankruptcy in 2013. There is no clear mechanism to deal with the issue of bankruptcy of a municipal body. These risks raise several doubts for the investors.