Municipal bonds programme

• To finance its 24×7 water supply project, the Pune Municipal Corporation has launched India’s biggest municipal bonds programme.
• The project looks to raise Rs 2,264 crore in five years.

About Municipal Bonds:

• Municipal bonds are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems.
• The Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs.125 crore with a State guarantee in 1997. However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without State government guarantee for financing infrastructure projects in the city. AMC raised Rs.100 crore through its public issue.
• Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds
• As per guidelines of the Urban Development Ministry, only bonds carrying interest rate up to maximum 8% per annum shall be eligible for being notified as tax-free bonds.

Analysis:

• Solving urban infrastructure problems requires a lot of money. ‘Muni bond’ issues could help corporations directly raise funds without looking to State grants or agencies such as World Bank. Large institutional investors such as pension funds and insurance companies are always on the lookout for look for less risky avenues to invest. Municipal bonds could tap these sources of fund and help get many projects off the ground.
• The money raised from municipal bonds can boost quality of life in cities. Job prospects in the locality may also look up. These bonds may also prove a good investment option for investors looking beyond fixed deposits and small saving schemes.
• Municipal bonds in India enjoy tax-free status if they conform to certain rules and their interest rates will be market-linked.

By: Vishal