Municipal Bonds in India: Definition, Types and List of Cities

A Municipal Bond is a debt instrument issued by municipal corporations or associated bodies in India to finance socio-economic development projects. Nine Indian cities have issued Municipal Bonds so far.
Created On: Dec 3, 2020 14:07 IST
Modified On: Dec 3, 2020 18:29 IST
Municipal Bonds
Municipal Bonds

A Municipal Bond is a debt instrument issued by municipal corporations or associated bodies in India. The funds raised through these bonds are utilized by the local government bodies to finance socio-economic development projects. 

JagranjoshImage: Working of Municipal Bonds

Why in news?

On 2 December 2020, Lucknow Municipal Corporation (LMC) bonds became the first Municipal Bonds from North India to be listed on Bombay Stock Exchange (BSE). The listing ceremony was attended by Uttar Pradesh's Chief Minister Yogi Adityanath.

With this listing, Lucknow became the ninth city in India to have issued Municipal Bonds and the first city to issue such a bond after the launch of AMRUT Scheme. Ghaziabad Municipal Bonds will be listed in the next three to six months followed by Pragyaraj, Varanasi, Kanpur and Agra, as per UP's CM Adityanath. 

Speaking on the occasion, UP's CM Yogi Adityanath stated, "It is a matter of pride for UP that the Lucknow Municipal Corporation has raised Rs 200 crore through its bond issue which got listed on BSE today. It is the trust of the investors which UP has earned during the last three and a half years of governance. It will augment our effort to improve infrastructure in urban areas and it shows the improvement in the Industrial climate of the state and the trust the investors have reposed in the state machinery.”

In the midst of COVID-19, Lucknow Municipal Corporation will progress towards achieving the ‘Aatmanirbhar Bharat’ vision of Prime Minister Modi with the listing of Municipal Bonds worth Rs 200 crore to improve the lives of the citizens living in its jurisdiction. 

What is a Bond?

A Bond is a fix income instrument, representing a loan made by an investor to a borrower. There are two types of Bonds:

1- Corporate Bonds (High-risk, High return)

2- Government Bonds (Low-risk, low return)

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Highlights of Municipal Bonds

1- The Municipal Bonds come with a maturity period of three years. 

2- The return on these bonds is provided either from property and professional tax collected or from revenues generated from specific projects, or both.

List of Indian cities that have issued Municipal Bonds 

City Amount (In crores)
Amravati Rs. 2000
Vishakhapatnam Rs. 80
Ahmedabad Rs. 200
Surat Rs. 200
Bhopal Rs. 175
Indore Rs. 140
Pune Rs. 495
Hyderabad Rs. 200
Lucknow Rs. 200

Types of Municipal Bonds

There are two types of Municipal Bonds in India as per their usage. These are:

1- General Obligation Bonds: These Bonds are issued to finance general projects such as improving the infrastructure of a region. The repayment of the General Obligation Bonds (with interest) is paid through revenues generated from different projects and taxes.

2- Revenue Bonds: These Bonds are issued to finance specific projects such as the construction of a specific building. The repayment of the Revenue Bonds (with principal and interest) is paid through revenues generated from the declared projects. 

What are 'Plain Vanilla Bonds'?

Advantages and Disadvantages of Municipal Bonds

Advantages

1- Transparency: These Bonds are rated by the renowned agencies of India, providing transparency related to the credibility of the investment option.

2- Tax Benefits: These Bonds are exempted from taxation in India subjected to investor's conformation to certain stipulated rules. The interest generated is also exempted. 

3- Minimal Risk: These are Government Bonds and comes with minimal risk.

Disadvantages

1- Long Maturity Period: These Bonds have a maturity period of three years thereby imposing a burden on the liquidity requirements of investors.

2- Low-Interest Rates: These are Government Bonds and their rates are considerably low when compared to returns from market-linked financial instruments such as equity shares.

Revised Guidelines by SEBI

In 2015, the Securities and Exchange Board of India (SEBI) revised the guidelines associated with the issuance of these bonds following which different Indian cities have now capitalised to fund initiatives such as Atal Mission for Rejuvenation and Urbanisation Transformation (AMRUT) and Smart Cities Mission.

SEBI Guidelines

1- No History of Defaulting: The Municipal body must not have a history of defaulting at repayments of loans or debt instruments acquired from financial institutions in the previous year.

2- Positive Net Worth: The municipal body must possess positive net worth in all the three years preceding the issuance of Municipal Bonds.

3- Willful Defaulters’ List: Municipal entities, their group companies or directors, and promoters shall not be mentioned in the willful defaulters’ list published by the Reserve Bank of India (RBI).

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