Even though the Reserve Bank of India (RBI) has allowed the foreign portfolio investors (FPIs) to invest in municipal bonds, it is one instrument, which is yet to become popular with the urban local bodies to finance their infrastructure needs.
According to a report by the Institute of Chartered Accountants of India (ICAI), from 1997 to 2013, different municipal bodies of 10-12 cities managed to raise Rs 1747 crore with the largest amount being raised Rs 300 crore by Karnataka Water and Sanitation Pooled Fund in 2010.
After the launch of Smart Cities and AMRUT scheme (which is an extension of the Jawaharlal Nehru National Urban Renewable Mission) in 2015, more cities are now looking to raise funds through municipal bonds, also called Muni bonds.
According to government data, eight cities have floated Muni bonds worth Rs 3,200 crore in 2018-19 under AMRUT. Andhra Pradesh Capital Region Development Authority (APCRDA), Amravati, has raised the highest Rs 2,000 crore through these bonds.
The first one to hit the market with its Muni bonds was Pune, which raised Rs 200 crore last June as part of its five-year bond programme for raising Rs 2,264 crore. Pune is offering a coupon rate of 7.59 per cent on Muni bonds, while Amravati is offering 8.9 per cent.
The others to raise funds through this route under AMRUT scheme are Ahmedabad, Surat, Hyderabad, Vishakhapatnam, Bhopal and Indore.
One of the targets under AMRUT is mobilising external resources and improve internal resource generation of the urban local bodies (ULBs). One of the resources of fund generation is access to municipal bonds by credit rating urban local bodies. There are 94 cities, which have been assigned credit ratings as smart cities and AMRUT cities.
The Securities and Exchange Board of India (Sebi) has laid down conditions for a municipality or a Corporate Municipal Entity to raise bonds. The conditions include that the municipal body should not have negative net worth in any of three immediately preceding financial years. It should not have defaulted in repayment of debt securities or loans obtained from banks or financial institutions during last 365 days and it should not have been named in the list of the wilful defaulters published by the RBI or should not have defaulted on payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any.