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‘Muni’ bond to the rescue. After Indore’s success, cities eager to raise their own funds

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Madhya Pradesh is taking the lead in ‘muni bonds’ with cities such as Gwalior, Jabalpur and Bhopal set to follow suit.

New Delhi: Taking a cue from Indore, several Indian cities are planning to make use of municipal bonds to raise funds critical for town planning and infrastructure upgrade, ThePrint has learnt.

Madhya Pradesh is taking the lead in “muni bonds” as these instruments are called, with cities such as Gwalior, Jabalpur and Bhopal seeking to follow Indore and emulate the success there.

The bonds issued by Indore Municipal Corporation were oversubscribed 1.26 times and collected Rs 214.9 crore.

Gujarat, Rajasthan and Maharashtra are among other states that have shown interest in muni bonds, government sources said. Although there is no clear estimate yet for the amounts these other cities want to raise, anything above Rs 200 crore each is a good number, analysts said.

Relief for policy-makers

Muni bonds are debt obligations issued by state and local government institutions to raise funds from the stock market to finance urban infrastructure. Their success has come as a huge relief for policymakers.

However, analysts said that to make this route a viable and successful one, municipal bodies needed to undergo a makeover and deliver to be able to woo investors.

At present, infrastructure financing is primarily undertaken by the Centre and state governments.

“Municipal bonds are critical for infrastructure funding, especially as the entire process, in this case, is managed by urban local bodies,” Nirupama Sounderajan, senior fellow at policy think tank Pahle India, told The Print.

“Investments for infrastructure must also come from these local municipal bodies and need not be totally driven by the Centre and the states,” she said.

Sounderajan, however, said that municipal bodies and their mayors too needed be get more active, perform and be “known” in their own localities.

“Their credibility needs to be built for the bonds to be successful,” she said.

Last year, 94 cities across 14 states that are part of the Smart City Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT) received credit ratings from agencies, a move that will help them issue muni bonds.

How it works

The Securities and Exchange Board of India (SEBI) had in July 2015 come up with a new framework of regulations to facilitate the issue and listing of these bonds. As per the SEBI framework, municipal corporations needed to have a positive net worth. The issuing municipal body must not have defaulted in repayment of debt securities or loans from financial institutions for a period of one year and also should not be identified as a wilful defaulter.

According to a study by Pahle India, 25 to 30 people from rural India migrate to the cities every minute in search of better job opportunities and an improved quality of life. This migration will lead to around 843 million people living in Indian cities by 2050, posing a huge challenge for urbanisation and the proposed smart cities, the report says.

This will require an estimated investment of about $1.2 trillion to build smart cities in the next 20 years.

Increased urbanisation will make the role of municipal bodies even more critical. These bodies are primarily responsible for town planning, including slum management and upgrade, maintenance of public amenities and public health and sanitation.

Lessons from other countries

Many countries including the US rely on the municipal bond market. These bonds issued by US local bodies were mostly made tax free to attract investors.

Large sums of money are required for the development of social and physical infrastructure and it is not feasible to just rely on the states and the Centre to keep pumping in money,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

“We must come out with viable alternative mechanisms to raise funds and municipal bonds fit into this space,” Ghosh added.

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