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Improving India’s Municipal Bond Market : SEBI Concept Paper

Finsec Law Advisors

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Urban Local Bodies are often in need of innovative funding mechanisms to cater to the needs of the growing population. Even though ULBs have traditionally issued bonds for raising funds, its market remains under developed. In order to tackle this, SEBI published a concept paper titled “Proposed regulatory framework for issuance of debt securities by Municipalities.”

The proposed regulations therein permit either the ULB or its subsidiary, created in the form of a corporate municipal entity, to undertake the issuance of bonds. As part of investor protection, the proposed regulations restrict the participation of an issuer with either negative networth or who has previously defaulted in its repayment obligations.

Revenue bonds will be the only kind of municipal bonds that can be issued through a public offering, as they would be serviced by revenues from a particular project or a specific set of projects. These bonds are compulsorily required to be listed and may be issued only after obtaining in-principle approval from a stock exchange and after obtaining a minimum credit rating of A+ from a recognised credit rating agency. The funds raised can be used only for the projects that have been specified in the offer document. A separate escrow account will be maintained for servicing them with the earmarked revenue from the projects and a monitoring agency shall be appointed to ensure compliance.

General obligation bonds are not backed by revenues from any particular project and may not be issued through a public offering. However, the proposed regulations permit both kinds of bonds to be issued through a private placement to institutional investors. Listing of privately placed bonds will require compliance with other conditions such as dematerialisation of the bonds and a minimum subscription per investor of Rs. 25 lakh. All municipal bonds, whether issued through public offering or private placement, require the issuer to maintain 100% asset cover sufficient to discharge the entire principal amount.

ULBs in India have only raised approximately Rs. 13 billion till date. The proposed regulations provide a clear mechanism for undertaking the issuance of municipal bonds and may play an important role in improving the regulatory conditions that presently hinder such issuance. If the US municipal securities market ($3.7 trillion) is anything to go by, developing India’s municipal bond market will result in immense development.