Recently, the Bombay Stock Exchange (BSE) listed the Lucknow Municipal Corporation (LMC) bonds worth Rs. 200-crore. This development marks Lucknow as the ninth city to raise municipal bonds, a strategy incentivised by the Ministry of Housing and Urban Affairs under Mission Amrut. The BSE, the oldest stock exchange in India and Asia, facilitates this process.
Mission Amrut
The Atal Mission for Rejuvenation and Urban Transformation (Amrut) was launched in 2015 to improve urban areas by ensuring every household has access to clean water, sewerage connection, open spaces like parks, and reducing pollution by promoting public transport or non-motorized transport like walking and cycling. It is a centrally sponsored scheme with 80% budgetary support from the Centre.
Explaining Municipal Bonds
A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures including constructing highways, bridges or schools. These institutions raise money from individuals or other institutions, promising to pay a specified amount of interest and returning the principal amount on a specific maturity date. Municipal bonds are mostly exempt from federal taxes and from most state and local taxes, which adds to their attractiveness, especially to people in high income tax brackets.
History of Municipal Bonds Issuance in India
India issued its first municipal bonds in 1997, five years after the 74th Constitutional Amendment decentralized urban local bodies. Between 1997 and 2010, the city corporations of Bengaluru, Ahmedabad, and Nashik experimented with bond issues but only managed to raise Rs. 1,400 crore due to lack of tradability and regulatory confusion. In 2015, the Securities and Exchange Board of India (SEBI) issued guidelines clarifying this status, increasing investor confidence. In 2017, Pune Municipal Corporation successfully raised Rs. 200 crore through muni bonds at an interest of 7.59% to finance its 24×7 water supply project.
Significance of Municipal Bonds Market
Municipal Bonds assist Urban Local Bodies (ULBs) in raising revenue to complete budgetary projects since property tax is the chief source of municipal revenue. The growth of municipal bond market is key for India’s cities and towns to enhance their infrastructure. Furthermore, the self-sustainability of municipal bodies is important to the success of the Centre’s projects such as Smart Cities and Amrut.
Benefits of Municipal Bonds for Investors
Investing in municipal bonds provides transparency due to prior rating by reputed agencies such as CRISIL, tax benefits, and minimal risk because of their issuance by municipal authorities. Typically, government bonds are viewed as low-risk investments.
Challenges with Municipal Bonds
However, certain challenges exist. There is reduced trust and confidence from investors due to weak financial positions and poor governance and management of city agencies. Additionally, the lack of authentic financial data creates doubt in investors. Other issues include low accountability and autonomy of city agencies, followed by the absence of a conducive environment.
The Way Forward
With the Covid-19 pandemic, revenue generation and state finances have been severely impacted, hindering the funding of ULBs. Nevertheless, under the Atmanirbhar Bharat Abhiyan package, states are offered increased borrowing capacity, based on potential reform of the urban property tax regimen. Unfortunately, most urban local bodies lack the institutional agency to raise funds, systemise accounting, and present bankable projects. To address this, the mandatory reforms enlisted in the 15th Finance Commission, which link the submission of audited accounts to grant disbursement, should be implemented. This will increase transparency within ULBs, improve their credit worthiness, and enhance their prospects of floating Muni bonds to contribute to building resilient infrastructure under Atmanirbhar Bharat Abhiyan.
