THE MUNICIPAL BONDS - GETTING READY FOR SOME ACTION!

By Ruma Dubey

There is a vibrant new bond market in the making. The Municipal Bond market. Yes, various states across India will now be able to trade and list their municipal securities, helping earn precious money.

Imagine owning a bond of BMC, the richest municipal corporation of India or what about Ahmedabad Municipality?

This sounds like a far-fetched idea at the moment but abroad, this municipal bond market is thriving and kicking. So how does this work? Lets begin, first thing first – why the need for this bond?

Presently, the municipality relies 100% on its own sources of revenue and grants from state and central Govts. But given the kind of infra development envisaged and constant upgradation required, this much money is insufficient, especially with the plans for smart cities also being chalked out. Thus given the need for infrastructure expenditure, and relative paucity of available funds, the significance of municipal bonds grows manifold as this becomes the best course to raise money.

What exactly are these bonds?

Look at the municipal bodies like a company – when it plans major modernization or expansions, it needs to raise funds and this is done through issue of bonds where people like you and me can also buy their debt. This debt is serviced through revenue generated through the new buildup of the infrastructure. This is not a new concept in India – already some municipal bodies have issued bonds, like Ahmedabad, Bengaluru, Nashik and Madurai but the difference is that they were placed with private institutions and for the first time, SEBI has allowed public offerings, which will be listed and traded.

Is the market big enough?

As CARE estimates indicate that between Rs1,000 – Rs. 1,500 Cr. could be raised by way of Municipal bonds every year over the next five years. And this is just the nascent stage given the statistics from USA and China, which are two of the largest municipal bond markets of the world. In USA, the municipal bond market is estimated to be worth around $3.7 trillion while that is China is stated to be worth $187 billion.

Are they trustworthy?

Well, we residents of Mumbai do not trust the BMC, that’s a fact; given the way the city is managed and having experienced the unprofessional attitude at their offices, it is a big question mark whether you would find the very same BMC investment worthy. LIC is a different league all together – it is a thorough, professionally run organization and there is blind faith. But what do you do if BMC does not pay your interest on time? China is already facing this issue where many local govt’s are feared to have defaulted. SEBI has assured us that it has put safeguards in place; we just have to have that faith in SEBI.

What are the safeguards?

SEBI has made it mandatory for all municipal corporations, aiming to tap the market to have investment grade credit rating, like corporate bonds. Ahmedabad Municipal Corporation and New Delhi Municipal Council have been rated as A-- 85 cities would be given credit rating by March next year. The main qualifying criteria as per SEBI is that the corporation must not have defaulted on any loans in the last one year and needs to maintain full asset cover to repay the principal amount. And like corporate, the money raised by the corporations for the said purpose needs to be kept in a separate escrow account wherein banks or financial institutions will monitor the account regularly.

Once you get over the “image” thing, should you invest?

Actually yes. It presents a great investment opportunity and it is beneficial not just for us citizens but will also boost the quality of life in cities, create more job opportunities as more and more infra gets built. These bonds will be tax free and interest will be market-linked. Being listed, liquidity will not be an issue as one need not hold it till maturity. The best part – they need to comply with detailed disclosure requirements, similar to that of IPOs.

We might see these bonds coming to the market only by next fiscal but consider them like an FD or bond. It’s a great move  and best way to incentivize the municipal bodies to clean their books and get their act together. Maybe this bond issue will finally force out at least some part of the corruption so synonymous with municipal corporations.