Municipal bond: Sebi plans new regulation

To provide new investment avenues to public and institutional players, market regulator Sebi is working on fresh guidelines for municipal bonds — a popular financial product in developed countries like the US.

The market for municipal bonds, also known as ‘muni bonds’, is yet to take off in India even though few municipalities here have offered such products in the past, while Ahmedabad Municipal Corporation in Gujarat was the first to launch such a bond way back in 1998.

Muni bonds are very popular among investors in many developed nations, especially the United States, where muni bonds have attracted investments totalling over $500 billion and are among preferred avenues for household savings.

These bonds are issued by urban local bodies to finance infrastructure such as water supply and sanitation. They serve as a tool for local bodies to mop up funds and can be extensively tapped to meet funding needs of urbanisation.

While there is already an existing framework for issuance of muni bonds, including by the Ministry of Urban Development, there are no unified norms to bolster this nascent market.
When asked about municipal bonds, Sebi chairman U K Sinha said there is a “preliminary thinking” at the capital markets regulator and other authorities would be consulted soon.

“It will have to be a joint effort of Sebi, Ministry of Finance and of course the concerned state government. Preliminary thinking is there ... may be after a couple of months, especially when some of the programmes from the government are very well known.

Everyone are waiting for budget announcements, things will move in that direction,” Sinha said on the sidelines of an event over the weekend.

The fresh push for muni bonds also comes at a time when the regulators and government are looking at ways to channelise household savings into the market to boost overall economic growth.

India's savings rate stood at little over 30 per cent of the GDP in 2012-13 fiscal while household savings rate was nearly 22 per cent during the same period.

In India, muni bonds were issued for the first time by a municipality in Gujarat, the home state of Prime Minister Narendra Modi.

Way back in 1998, Ahmedabad Municipal Corporation had become the first municipality to come out with muni bonds. Since then few others, including Greater Vishakhapatnam Municipal Corporation, had issued such bonds.

India would need more than $800 billion investments to cater to the urban infrastructure needs over two decades, as per industry chamber Assocham, and muni bonds can serve as an effective fund-raising instrument in this regard.

Besides the US, other countries with a developed muni bond market include Canada and Russia.