Municipal Bonds

  • A municipal bond is a bond (debt security) issued by a local government, or their agencies.
  • ‘Muni bonds’ are very popular among investors in many developed nations, especially in the U.S., where these have attracted investments totalling over $500 billion and are among preferred avenues for household savings
  • The Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs.125 crore with a State guarantee in 1997. However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without State government guarantee for financing infrastructure projects in the city. AMC raised Rs.100 crore through its public issue.
  • Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds
  • As per guidelines of the Urban Development Ministry, only bonds carrying interest rate up to maximum 8% per annum shall be eligible for being notified as tax-free bonds.
  • Institutional investors, as well as the public, can buy these bonds.
  • The corporations can use the revenues earned from the developmental projects like Metro rail network to repay the interest and principal on these bonds.
  • These municipal bonds have now been permitted for public offering by SEBI.
  • Money needed for urban governance can be raised via this route
  • India needs 1 trillion dollar for infrastructure development. Bond market can be an effective way to raise this money.
How is the Central Government promoting Municipal Bonds?
  • Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, urban local bodies (ULBs) are encouraged to tap the bond market.
  • AMRUT Scheme: It was launched in 2015 by the Ministry of Housing and Urban Affairs. It aims to ensure universal coverage of drinking water supply and substantial improvement in coverage and treatment capacities of sewerage and septage along with storm water drainage, non-motorized urban transport and green spaces & parks.
  • The government also pays ULBs Rs 13 crore for every Rs 100 crore raised via bonds subject to a ceiling of Rs 26 crore for each. This incentive takes care of the repayment that the ULB must make to the lender including the interest component.
Why in news?
  • SEBI governor has asked the Municipal bodies to move to a standard accounting practice. This will not only attract better credit rating but also demand from more investors
  • He has also asked stakeholders to engage with other financial regulators such as IRDAI (insurance regulator), PFRDA (pension regulator) and EPFO (employee provident fund organization)
  • Lucknow Municipal Bonds listed on BSE.

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