On August 29, the Securities and Exchange Board of India (SEBI) organised a Municipal Bond Outreach Programme in Bhopal, Madhya Pradesh as part of its attempts to empower Urban Local Bodies (ULBs) with expertise on municipal bonds and capital market fundraising for infrastructure development.
This was not the first such exercise undertaken by the capital markets regulator that has been working towards making municipal bonds more popular. So, what exactly are municipal bonds and how can one invest in these instruments.
Here’s all you need to know about municipal bonds.
What are municipal bonds?
Municipal bonds – popularly known as muni bonds – are basically bonds issued by municipal bodies to raise funds for public infrastructure development. Such bonds can be used to raise money for creating infrastructure like roads, sewage, sanitation, airports, hospitals, school and water supply among other things. Since these bonds are issued by government bodies, they are typically considered quite safe.
Further, there are two types of muni bonds – general obligation bonds and revenue bonds. General obligation bonds are typically serviced through the income of the municipal body. Revenue bonds, on the other hand, are serviced by the revenue of the particular project for which the funds have been raised.
How old is the municipal bond market in India and how many bodies have raised funds?
The municipal bond market in India came into existence in the late 1990s – Bengaluru Municipal Corporation was the first to issue a bond in 1997 -- but gained traction only in the last decade as SEBI came out with detailed regulatory framework for the issuance and trading on municipal bonds in 2015.
Since then, there has been an uptick of sorts with more than three dozen municipal bodies issuing bonds to raise funds for various projects. Various municipal corporations including those of Pune, Indore, Bhopal, Greater Hyderabad, Ahmedabad, Lucknow, Ghaziabad, Vadodra, Pimpri Chinchwad, Rajkot, Agra and Prayagraj among others have used the muni bonds route to raise funds.
Data from SEBI shows that since June 2017 and till May this year, a total of around Rs 3,134 crore has been raised through municipal bonds.
Is it safe to invest in municipal bonds?
As mentioned earlier, municipal bonds are issued by government bodies and so are considered safe for investment. Further, all such bonds come with a credit rating as well that help investors take better informed decisions based on their own risk appetite and the rating of the bond instrument.
Further, there are certain tax benefits as well for investing in muni bonds. Also, with the SEBU guidelines in place, there is enough transparency and disclosure as well with respect to the bond instrument.
How can one invest in municipal bonds?
There are various online bond platforms through which one can invest in municipal bonds. Since, both NSE and BSE offer a platform for municipal bonds, most of the leading broking houses also offer trading and investment services related to these bonds.
Can retail investors invest in municipal bonds?
Yes, retail investors can also participate in the municipal bonds segment. Incidentally, earlier the minimum investment ticket size was Rs 10 lakh, making these instruments a bit out of reach of an average retail investor. But now the minimum ticket size has been reduced to Rs 10,000 and hence retail investors can also invest in municipal bonds.
What is the kind of returns one can expect in municipal bonds?
Municipal bonds offer a return that is typically higher than a bank deposit. Data from SEBI shows that the coupon rate of some of the municipal bonds is in the range of 9-10 percent as well. For instance, a Rs 100 crore bond issue of Greater Hyderabad Municipal Corporation in August 2019 with a tenure of 10 years came with a coupon rate of 10.23 percent.
In 2018, bond offerings of Bhopal Municipal Corporation and Greater Vishakhapatnam Municipal Corporation had a coupon rate of 9.55 percent and 10 percent, respectively. However, most of the municipal bond offerings have a coupon rate in the range of 8-9 percent.
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