Sebi prepares ground for municipal bonds

The Securities and Exchange Board of India (Sebi) is preparing the ground for the launch of municipal bonds, a popular debt instrument issued by local governments globally.

Sources said Sebi planned to float a discussion paper on the issuance and trading of municipal bonds, popularly called muni bonds. To ensure this is a viable proposition, the regulator is in talks with the finance ministry to ease the norms on pricing such bonds. Sebi has sought the cap on the coupon rate on such bonds be relaxed if these are issued under the ‘tax-free’ category.

According to rules, a tax-free debt instrument has to be priced at a minimum stipulated discount to similar-tenured government securities. “In a rising interest rate environment, a ceiling on the coupon rate could prove to be a hindrance for municipal authorities to launch these bonds,” said an expert.

Such instruments are popular among global investors, as these offer relatively higher yields, as well as tax breaks. The funds raised by local governments through such bonds are spent on developing local infrastructure such as schools, roads, hospitals and sewage systems. Globally, the market for municipal bonds is estimated at about $3.5 trillion.

The first municipal bonds in India were issued in 1995, while the first state-guaranteed bonds were launched by the Bangalore Municipal Corporation in 1997. In 2010, the Greater Visakhapatnam Municipal Corporation issued bonds worth Rs 30 lakh.

In November 2013, the Associated Chambers of Commerce and Industry had written to the Reserve Bank of India to allow municipal bonds to be traded. In December, Sebi had set up a 20-member committee to develop a market for such bonds. Experts say India’s municipal bond market faces various hurdles, including low ratings, reluctant investors and unclear regulation. Municipalities in metros and other large cities are reluctant to turn to the debt market, as these are flush with cash. Municipalities in tier-III and tier–IV cities, which need capital, don’t have access to bond markets and rely on Housing and Urban Development Corporation for funding.

Sebi has sought credit enhancement for municipal bonds by providing banks or financial institutions as guarantors for the bonds. “Allowing credit enhancement will certainly increase the marketability of such bonds and attract long-term investors such as pension and insurance companies,” said an expert.