Tax-free bonds, a taxing task

Tax-free bonds, a taxing task

Palike intends to raise Rs 1,000 crore by issuing municipal bonds

The ambitious plan of the Bruhat Bangalore Mahanagara Palike to raise a whopping Rs 1,000 crore by floating municipal bonds this fiscal appears to contravene the guidelines of the Union Urban Development Ministry which forbid municipal corporations from raising tax-free bonds above Rs 300 crore.

The annexure-II to the guidelines for issue of tax-free municipal bonds states: “The maximum amount of tax-free municipal bonds as a percentage of the total project cost (excluding interest during construction) will be 50 per cent or Rs 300 crore, whichever is lower.” It also says that the ministry will approve the issue size on a case to case basis.

The Palike has another hurdle on its way to raise money. The central regulations suggest a credit rating from a reputed agency as a pre-condition to issue bonds. The last known credit rating was conducted in 2010 by two agencies - ICRA and CARE - and since then it is said the Palike is yet to show signs of improvement in its rating to issue bonds.

While ICRA rated the BBMP at ‘-BB,’ CARE has given ‘+BBB’ grade to the BBMP. Both the ratings suggest that the Palike’s financial situation is one which is ‘considered to have moderate risk of default regarding timely servicing of financial obligations’. The Palike officials are however confident that the ratings will improve, provided the credit rating agencies consider their suggestion of having a separate parameter to rate the civic body.

“Most urban local bodies are not driven by profit motive. They are riddled with considerable social obligations. Hence, their creditworthiness cannot be assessed on the basis of the parameters applied to profit-oriented private or public undertakings,” a senior official at the Palike said. The Palike representatives will be meeting the credit rating agencies to put forth their contention and convince them to adopt a separate parameter to assess the creditworthiness of BBMP.

Assets inventory

According to the officials, with the addition of  110 villages, six city municipalities and a town municipality, the assets inventory of the Palike will have to be made for raising the creditworthiness of the BBMP. A financial consultant will be appointed to look into the possibilities of raising money by issuing municipal bonds.

Shankaralinge Gowda, the Palike Commissioner, was upbeat over the possibilities of raising Rs 1,000 crore through municipal bonds. “The bonds are not for the common man.
It is basically the financial institutions which invest in the bonds. We believe the ratings are good enough for investors to subscribe to our bonds.”

The Bangalore Municipal Corporation was the first municipal corporation in the country issue the municipal bonds in 1997.

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