MC Explains| What are municipal bonds, how does the process work and other questions answered

Similar to corporate bonds, municipal bonds are issued by civic bodies to finance urban infrastructure.

A surge in municipal bond sales this year has become the talk of the debt market after a raft of civic bodies announced plans to raise funds through this channel.

Some from the state of Uttar Pradesh have started the process of inviting applications for merchant bankers to oversee their bond issues.

The increase follows the Centre's focus on the need for civic bodies to raise money through such channels rather than relying on grants from the central and state governments. Moneycontrol explains how the process works.

What are municipal bonds? 

Municipal bonds are similar to corporate bonds, but they are issued by civic bodies to finance urban infrastructure projects, rather than businesses.

Municipal corporations issue bonds to raise funds from individuals and institutions. The investors are promised a specified interest and return of the principal amount on a maturity date. The bonds can be issued by states, cities, counties, utility providers, transit authorities, school districts and hospitals.

Also read: Exclusive | UP’s two municipal corporations plan bond issue: Sources

Which municipal corporations are planning bond sales?

The corporations are Prayagraj Municipal Corporation, Kanpur Municipal Corporation, Varanasi Nagar Nigam, Agra Nagar Nigam, and Greater Chennai Corporation, sources close to the development told Moneycontrol.

Municipal bonds

Among these, Kanpur Municipal Corporation may raise Rs 100 crore, Agra Nagar Nigam Rs 50-100 crore, and Greater Chennai Corporation up to Rs. 200 crore, the sources said.

All these corporations have invited applications for the selection of transaction advisor-cum-merchant banker.

Why are these civic bodies raising funds?

Nagesh Chauhan, head of debt capital markets at Tipsons Group, said the Centr is focusing on efforts to make the bond market more vibrant in line with offshore markets where municipal corporations raise funds for their projects and working capital rather than relying on grants from central and state governments.

The government is also working towards making these municipal corporations acceptable to the market by providing them subsidies for fund raising through the capital markets; it is identifying climate-friendly projects at the ground level for civic bodies to implement.

What is the reason for the Centre’s emphasis on municipal bond sales? 

In Budget 2023, Finance Minister Nirmala Sitharaman said cities will be incentivised to improve their creditworthiness in order for them to issue municipal bonds.

Measures are being taken by the regulators to deepen the municipal bond market. Recently, the Reserve Bank of India (RBI) said listing municipal bonds on the stock exchanges can pave the way for developing a much-needed secondary market.

Also read: Exclusive | Varanasi, Agra, Chennai municipal bodies plan bond sale: Sources

Which are the major past issuances? 

In the last 10 years, municipal corporations have raised over Rs 4,000 crore through municipal bond sales, market participants say. According to Prime Database data, Vadodara Municipal Corporation, Ghaziabad Nagar Nigam, Greater Hyderabad Municipal Corporation and Indore Municipal Corporation are among the civic bodies that have sold municipal bonds since 2013.