Sebi eases norms to allow smart cities raise funds through ‘Muni Bonds’

Sebi has relaxed norms for ‘Muni Bonds’ issuance to help smart cities as well as entities working in areas of city planning and urban development work, including municipalities, raise funds through debt securities.

The decision comes after the board of Securities and Exchange Board of India (Sebi) approved norms in this regard in August.

Nearly five years ago, the regulator had come out with the Issue and Listing of Debt Securities by Municipalites (ILDM) Regulations and since then seven municipalities have raised nearly Rs 1,400 crore by issuing their debt securities, which are commonly known as ‘Muni Bonds’.

Now, Sebi, in a notification dated September 27, said it has opened this route for a larger number of entities, including special purpose vehicles set up under the central government’s ambitious ‘Smart Cities Mission’.

Under the new norms, the watchdog has done away with requirements like appointment of a monitoring agency, filing of viability certificate or Detailed Project Appraisal Report, setting up of a separate project implementation cell, maintenance of 100 per cent asset cover with specification of resources and mandatory backing of state or central government.

Previously, this fund-raising route was 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.

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.

Taking into account the feedback, the regulator has amended the regulations to provide a greater flexibility in raising funds and for strengthening protection for investors.

The new norms would allow issuance of ‘Muni Bonds’ also by other entities 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 has allowed 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 amended regulations would permit raising funds through Muni Bonds by Special Purpose Vehicles (SPVs) set up for implementing smart city projects.

Under the government’s smart city initiative, SPVs have been set up at city level in the form of a limited company under the Companies Act for implementing the projects. They 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. These activities are similar to those performed by municipalities.

Sebi said “any municipality or any statutory body or board or corporation, authority, trust or agency established or notified by any central or state Act or any SPV notified by the state government or central government,” would be eligible to issue Muni Bonds.

In addition, any structure set up by a state government under the Pooled Finance Development Fund would be eligible to issue Muni Bonds. This would be subject to the condition that the entity concerned carries out one or more functions of a municipality.

The regulator has amended norms 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, the regulator has eased rules pertaining to creation of escrow accounts and done 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 dropped.

In case of private placements, the minimum subscription amount per investor is currently Rs 25 lakh, which has been reduced to Rs 10 lakh to align it with the regulations for corporate bonds.

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.

“Any offer (private placement) or invitation made to qualified institutional buyers shall not be considered while calculating the limit of 200 persons,” the notification noted.

Besides, the filing of draft offer and the final offer document with Sebi have been issued for private placements in addition to public issues.