Madhya Pradesh recently became the first state to list municipal bonds on the National Stock Exchange (NSE).
Unlike US, municipal bonds have not tasted much success in India. However, with India’s cleanest city Indore recently becoming the first state to list municipal bonds on the National Stock Exchange (NSE), the things are expected to change. The civic governing body of the city of Indore issued bonds aggregating Rs 100 crore with green shoe option of Rs 70 crore on June 29 and received an overwhelming response with an over-subscription of 1.26 times. This is the third such listing after the urban bodies of Hyderabad and Pune listed their bonds in the last one year. Here we will discuss all details related with these bonds:
What are municipal bonds?
Also known as munis, municipal bonds are fixed income instruments or debt securities which are issued by municipal corporations, government and semi-government institutions to raise funds. Generally, they carry fixed interest rate and redeemed at par. These bonds are generally of two types:
1.General obligation bonds
These are issued for enhancing civic amenities such as water, sanitation, and other works.
Revenue bonds are issued for a particular purpose such as construction of a toll road or a toll bridge.
Who can buy them?
It’s since 1997 that municipal bonds are in the market. Bangalore Municipal Corporation was the first urban local body (ULB) to issue Municipal Bond in India in 1997. Currently, retail investors are not allowed to invest in municipal bonds, besides most mutual funds have also been shy of these bonds, since these instruments are still new in the capital market. However, retail investors can buy these bonds once they hit the secondary market inside their allotted lot size. The major investment participants are financial institutions, mutual funds, HNIs, banks and pension funds. SEBI has placed several conditions to safeguard the interest of the bondholders. Municipal bonds enjoy tax-free status since 2001 (subject to certain conditions).
The bonds issued by Indore Municipal Corporation were raised for new-generation urban clusters under the Smart City programme. Indore Municipal Corporation, rated as AA (SO), or two notches lower than the top grade, raised about Rs 140 crore by selling bonds, which offered 9.25 percent with 10-year maturity.