India’s First-ever Municipal Bond Issue For Retail Investor Just Opened. Can It Become the Primary Source of Financing For Our Cities?

Indore’s municipal corporation recently launched the first municipal bond issue targeted towards retail investors. 

While the base issue size is Rs 122 crores, the offer allows the municipal corporation to retain another Rs 122 crores, taking the entire aggregate to Rs 244 crores. 

The Indore Municipal Corporation was also the first to list bonds on NSE in 2018. 

While there have been sporadic bond issues by Indian municipal corporations earlier, most of these issues have been targeted towards institutional investors. However, over the last few years, the Indian bond market has begun attracting retail audiences. At the same time, various platforms have sprung up to make investing in these bonds easier for retail investors.

Why are Muni Bonds Not Popular In India?

The first bond issue was launched in India by Bengaluru municipal corporation (MC) in 1997, followed by Ahmedabad MC in 1998. 

Between 1997 and 2013, only 22 issues for municipal bonds (munis) were launched – raising Rs 1353 crores in total, a paltry figure compared to the overall finances of MCs. 

Thanks to the government’s increasing focus on progressive financing for municipal corporations, between 2014 and 2022, MCs raised Rs 4898 crores through these bonds. Yet, Indian municipalities stand nowhere when compared to advanced countries. 

Mature economies usually have a more decentralised financing mechanism. In the US, the municipal debt stands at $ 4 trillion, nearly 16% of the country’s GDP. 

In India, the total borrowing of municipal corporations stood at just 0.05 per cent of the GDP, most of which was from state governments and banks. 

Between 1997 and the mid-2000s, India’s municipalities continued to raise funds from capital markets, but with the launch of ‘Jawaharlal Nehru National Urban Renewal Mission’, grants again became the primary source of funding.

Indian municipalities, on the other hand, primarily rely on government grants-in-aid and government loans. Further existing laws also make it challenging to raise money from capital markets. In addition, there is significant red tape when it comes to bond raising, in terms of getting the required permissions from the state, repayment periods, instruments used, etc. 

Indian laws in their current form don’t have enough provisions in terms of bankruptcy protections, making municipalities and states hesitant to raise debt or allow raising debt, respectively.

According to an RBI report, “Municipal Corporations (MCs) in India are required by law to maintain a balanced/surplus budget and hence, they have not been able to tap capital markets sufficiently to supplement their revenues. They have remained dependent on State and Central government transfers.”

Indian municipal corporations are also plagued with inefficiencies and limited opportunities to increase revenues. It becomes difficult to pay back the bonds without adequate revenues from the capital expenditures made using borrowed money.

 An RBI paper released last year said that the 201 MCs that were analysed had their own tax revenue stand anywhere between 30-35% of total receipts, and property tax alone made up 14 per cent of total receipts. After the Goods and Services Tax (GST) launch, other taxes like octroi became obsolete. As a result, MCs in India are dependent on property taxes.

Government Encourages Muni Bonds

The Indian government has been working on incentivising municipal corporations to raise more money through capital markets. 

One of these incentives is the provision of aid at the rate of Rs 13 crore for every Rs 100 crore of bonds issued under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) programme. 

Earlier, the government had introduced pooled funding mechanisms to help financially weak municipalities raise capital. In 2015, the Securities and Exchange Board of India (SEBI) passed regulations to encourage the launching of muni bond offerings.

These issues have contributed to a stagnated muni bond market in India. Issuance of debt from capital markets would incentivise municipalities to fund new projects and improve civic infrastructure while forcing them to cut down on flab and become financially disciplined. Today, several other cities are exploring fundraising through bonds as well.