MC Explains: What are municipal bonds? All you need to know

Although Indore is the first to target individual/retail investors, municipal bonds have hit the street before but catering only to institutional investors.

The Indore Municipal Corporation opened its first public issue of green bonds on February 10 to raise Rs 244 crore, Moneycontrol reported. With municipal bonds becoming the talk of the town, here is an explainer to understand the instrument and its purposes.

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

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 the maturity date.

The bonds can be issued by states, cities, counties, utility providers, transit authorities, school districts, and hospitals.

Municipal bonds became popular over the past few years as most municipal corporations with ratings of AA and above started tapping the bond market to raise funds.

These bonds are also gaining popularity due to the coupon rate offered, which is higher than that of public sector undertaking bonds.

“Further, these municipal bond issue sizes are comparatively smaller in nature and hence can easily fetch very good investor demand from high net worth individuals and retail investors,” said Venkatakrishnan Srinivasan, founder of Rockfort Fincorp.

According to market participants, large tier 1 municipalities generally have surplus cash and can meet repayment obligations without a problem.

Tier 2 municipalities set aside a part of their internal cash accruals and this escrow mechanism can meet repayment obligations.

“Weaker municipalities can pool their receivables together in a structured escrow mechanism to service their repayment obligations,” Srinivasan said.

Also read: India’s first-ever municipal bond issue for retail opens today; should you invest?

According to the Prime Database, municipal corporations raised Rs 3,991 crore through bond issues from 2013 to 2022.

The municipal corporations of Greater Hyderabad, Indore, Bhopal and Greater Visakhapatnam were among those that together raised Rs 2,790 crore in 2018. In 2022, Vadodara municipal corporation was the sole issuer and raised Rs 100 crore.

The Indore municipal corporation’s issue of green bonds, which opened for subscription on February 10, intends to raise up to Rs 244 crore to fund a solar power project.