After remaining lull for more than ten years, the municipal bond market is showing signs of revival. Just a few days back, the Pune Municipal Corporation raised Rs 200 crore and now the New Delhi Municipal Corporation (NDMC) is planning to raise Rs 200 crore.
Experts say, going ahead, more such issue will be lined up with Indore, Ahmadabad, Navi Mumbai and Greater Hyderabad following Pune and NDMC's path.
"The municipal bond market is seeing some activity, thanks to the government's proactive stance. I am told that urban development ministry and finance ministry are actively pushing municipal corporations to take this route. The interest subsidy of two per cent from government has come as cherry on the cake. Once trading starts in these bonds and liquidity improves, there will be lot more interest", Santosh Muchhal, a chartered accountant, said.
The revival has partly been possible because of Securities and Exchange Board of India's (SEBI) relaxed guidelines for municipal bonds which came in March this year. SEBI allowed municipalities with budgetary surpluses in the preceding three financial years to issue public debt securities. Under earlier rules, municipalities could not issue bonds if they had negative net worth for the three years preceding the offering.
NDMC is planning to raise Rs 200 crore to strengthen its electricity distribution network. The bond has been assigned a provisional ‘AA+’ rating with a stable outlook.
"In India, the problem with urban local bodies is that they are financially strained and that is why they do not enjoy good credit ratings. Poor credit rating means investors won't be interested. But it's good that some of the financially stable municipal corporations are taking this route. It opens up a new mode of fund-raising for them which was earlier non-existent", said Kilol Pandya, head of fixed income at Peerless mutual fund.
Pandya said municipal bonds are a huge market globally especially in the US where large institutional investors participate."There, it is treated as a quasi- government security".
Experts feel that there is enough liquidity in the market and therefore demand for good quality papers. Municipal corporations with good ratings and attractive interest rates will be lapped up by the market. Currently, only institutional buyers such as banks and insurance companies participate in these issues, but once trading starts happening in these securities, retail investors might also participate.
