Infrastructure boost: Narendra Modi government empowers municipal corporation to issue bonds

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Updated: June 1, 2017 12:41:53 PM

The government has allowed as many as 26 municipal corporations to issue bonds to raise funds for developing urban infrastructure under initiatives like Smart Cities Mission and AMRUT.

Infrastructure boost, Narendra Modi government, Narendra Modi, municipal corporation, urban infrastructure, urban development ministry, AMRUT mission, real estate, infrastructure projects Up to 26 bodies get nod; Ahmedabad, Pune among first after 2-decade gap. (Image: Reuters)

The government has allowed as many as 26 municipal corporations — including those in New Delhi, Navi Mumbai, Pune, Kolkata, Nashik, Ahmedabad, Hyderabad, Jaipur, Bhopal and Lucknow — to issue bonds to raise funds for developing urban infrastructure under initiatives like Smart Cities Mission and AMRUT, senior government officials told FE. It is for the first time such a large number of local government bodies have been allowed to hit the bond market.

The Union urban development ministry expects municipal bonds of Rs 7,500 crore to be issued in the current fiscal itself, said an official source. Although it’s too early to have a precise estimate of the overall bond size of these 26 corporations, as many of them are yet to initiate the processes, some analysts peg it at around Rs 10,000 crore.

The urban development ministry has proposed to offer the municipal corporations a 2% interest subsidy on the size of bonds after the finance ministry turned down its request to make gains from the municipal bonds tax-free for investors. The urban development ministry has earmarked as much as Rs 400 crore for this purpose, of which at least Rs 60 crore could be provided in the current fiscal, official sources said. The ministry is willing to consider offering higher subsidies than the Rs 400 crore if the corporations issue more bonds than assumed now, said the sources. But the 2% cap will remain.

The subsidy is intended to help the corporations, given that while they can raise funds at 8-8.5% interest through bonds that are without tax-free status, making gains tax-free for investors could enable them to raise money at a lower rate of around 7%. Rejecting the grant of tax-free status to these bonds, the finance ministry argued that any such move could distort the bond market and result in a potential tax revenue loss of Rs 180 crore a year, said the sources.

“We have decided that we will compensate the urban and local bodies (against the lack of tax-free status for bonds). This incentive will be provided from funds under the AMRUT mission,” urban development secretary Rajiv Gauba said. Pune and Ahmedabad will be among the first municipal bodies to issue bonds. The Pune Municipal Corporation has already initiated the process for a bond offering of Rs 2,300 crore, in what could be the country’s largest municipal bond issue and the first one after a gap of around two decades. The Ahmedabad Municipal Corporation also plans to float bonds of Rs 200 crore. The sources said the Greater Hyderabad Municipal Corporation is also eyeing Rs 1,000 crore through bonds.

Municipal corporations in Surat, Vadodara, Pimpri Chinchwad, Mira Bhayandar, Thane, Vasai-Virar City, GVMC (Visakhapatnam), Vijayawada, Kishangarh, Bhiwadi, Jhunjhunu, Warangal, Indore, Jabalpur and Mangaluru have also been allowed to issue bonds.

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The ministry has asked all the corporations to go for credit rating to be able to float bonds. This exercise of getting credit rating on such a large scale hasn’t been undertaken ever. “The municipal bond market was extremely small and the bonds were issued sporadically many years ago in a few cities, including Ahmedabad and Bangalore. And the total bond issues, cumulatively, have been of the order of just Rs 1,600-1,700 crore in all these years,” Gauba said.
The tapping of the bond market by the government was largely used to bridge the Centre’s fiscal deficit while states have been allowed intermittently to issue bonds under the Centre’s overall regulations.

Last month, the Centre allowed state government entities that are financially sound to borrow directly from the country’s bilateral official development assistance partners for implementing critical infrastructure projects. The move came amid realisation that several infrastructure projects being implemented by state government agencies, even if viable and sound, have huge funding requirements and borrowing by state governments for such projects may exhaust their respective borrowing limits.

Banikinkar Pattanayak & Surbhi Prasad

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