Ahead of the presentation of the interim Budget, bond market experts have pitched for steps to deepen India's municipal bond market and encourage more investor participation.
“If the Budget introduces favourable measures, such as incentives or simplified processes, it could encourage more municipalities to tap the bond market,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
What is a municipal bond?
A municipal bond is a debt instrument issued by corporations under municipal laws with the permission of the respective state governments. The funds raised are used to finance projects for socioeconomic development such as building bridges, schools and hospitals.
Currently, the municipal bond market in India is at a nascent stage with limited issuers raising low amounts. This, experts said, was due to less support and more dependence on loans from state and central governments.
They said incentives could make it easier for local governments to raise funds for essential projects, further contributing to community development.
This year, the government will present an interim Budget ahead of the Lok Sabha elections due by May. Finance minister Nirmala Sitharaman has said there are unlikely to be any "spectacular announcements" in the interim Budget.
In an election year, the government presents only an interim Budget or seeks a vote on account, and leaves it to the next government to present the full Budget.
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Will these announcements increase issuances?
Experts are of the view that further support from the government to municipal corporations for raising funds will increase the number of issuers.
Ajay Manglunia, managing director and head of investment group at JM Financial, said, “Seeing the trend we expect more issuers to come to the market as the government has put thrust on infra development.”
Reduced barriers and increased financial incentives can make municipal bonds a more attractive option for local governments to raise funds for development projects, Srinivasan added.
Announcements in Budget 2023
An official at a municipal corporation who did not wish to be named said the corporation expects similar incentives that the government announced in the previous Budget.
In 2023, finance minister Nirmala Sitharaman said cities will be incentivised to improve their creditworthiness so that they can issue municipal bonds.
In November 2022, an RBI report said that an under-developed municipal bond market is putting local bodies looking to bridge their resource gap in a spot and forcing them to rely on loans from the central and state governments and borrowings from banks and financial institutions.
Listing such bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India, the regulator’s maiden report on municipal finances said.
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Recent issuances
On January 15, Moneycontrol reported that Ahmedabad and Vadodara municipal corporations planned to raise a combined Rs 300 crore through green municipal bonds.
In 2023 the Pimpri Chinchwad Municipal Corporation raised Rs 200 crore through maiden municipal bonds maturing in five years. The corporation set an 8.15 percent coupon on the bonds.
The corporation said it would use the funds to develop the Mula River from Wakad Bypass to Sangvi Bridge under the Pune River Rejuvenation Project.
The Indore Municipal Corporation listed its green bonds last year on the National Stock Exchange of India. The public issue got an overwhelming response with an overall subscription of 5.91 times the issue size.
According to Reserve Bank of India data, municipal corporations raised over Rs 4,000 crore through bond sales from 2011 to 2021.
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