Empowering urban development: The rise of municipal bonds in India

What is common between the municipalities of Indore, Pune, Rajkot, Greater Hyderabad, Ahmedabad and Lucknow? They have all raised funds for their projects from the debt market by issuing an instrument called municipal bonds.

Over the last 7 years, 13 municipalities from across the country have floated bonds and raised funds from the market. Hyderabad, Ahmedabad and Indore have respectively raised ₹495, ₹400 and ₹383.9 crore from the market over the years. These 13 municipalities have together raised a total of ₹2,783.9 crore. Local bodies like those of Greater Hyderabad, Ahmedabad, Indore and Vadodara are approaching the market more than once.

These municipalities usually tend to approach the debt market to finance development work or projects such as smart cities. 

For instance, in February 2024, the Ahmedabad Municipal Corporation listed ₹100 crore from the bond market to support the implementation of a range of green initiatives, such as green energy generation and zero liquid discharge for industrial purposes. This includes the purification of sewage water, aligning with the goal of sustainable urban development.

Law firm MV Kini advised 11 of these 13 municipalities. The firm’s partner Vidisha Krishan, along with senior associate Astha Talwar, who led all these transactions, explains the evolution of municipal bonds, why local bodies prefer to approach the debt market rather than asking the Central government for funds, how safe is it to invest in these bonds and the role they played in getting these bonds listed. 

How did it all begin?

Krishan noted that the municipalities are incentivised and encouraged by the Central government to reach out to the debt market to ensure that they have more financial independence and accountability instead of relying solely on central funding as part of an overall expansion of the Indian Economy.

The AMRUT (Atal Mission for Rejuvenation and Urban Transformation) scheme, launched by the Government of India in 2015, aimed to improve urban infrastructure in cities across the country. It has significantly encouraged the issuance of municipal bonds by creating a conducive environment for urban financing. Ministry of Housing and Urban Development provided financial incentives to urban local bodies (ULBs) that raised funds through municipal bonds. AMRUT 2.0 was launched by the Prime Minister in 2021. 

AMRUT’s focus on project-specific financing allows municipalities to showcase the viability of their projects to potential investors. This transparency in turn boosted investor confidence in the bonds issued to fund AMRUT projects.

The Securities Exchange Board of India (SEBI) regulates the issuance, listing and trading of municipal bonds. SEBI has established a regulatory framework specifically for municipal bonds under the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2015. In addition to this, SEBI has issued circulars, FAQs and guidance notes from time to time to regulate municipal bonds. 

Pursuant to such schemes, the municipalities started approaching the bond market to fund specific projects. The highest amount raised through a single listing of municipal bonds was ₹244 crore, by the Indore Municipal Corporation in 2023. 

Krishan said,

“If a region has to compete for investment, grow and give better service to its populace, it has to incentivise investors to fund it. This is a viable alternative to to bank financing and Central or State government financing. If you put each municipality under a requirement of raising its own bond and paying it off, I think at a grass-root level, you're making everyone very, very independent.”

Are municipal bonds safe?

Municipal bonds are safe and transparent, like any debt instrument issued in the stock market. 

According to Krishan, the bonds issued by municipal corporations often receive ratings of AA or AA+, reflecting their sound financial structures and project-specific funding. With appointed debenture trustees and stock exchanges overseeing compliance post-issuance, municipalities are required submit regular financial statements and utilisation certificates. This rigorous monitoring ensures that funds are allocated appropriately and that projects remain on track.

Challenges in getting municipal bonds listed

Recollecting her first experience with municipal bonds, Krishan said,

“We had SEBI regulations, and we had the merchant banker and the issuer just trying to figure out exactly how to create a security for these bonds. We had to figure out a mechanism to fit municipalities into the regulatory framework of the bond market.”

She noted that since municipalities functioned as per their own rules (each municipality has its own governing legislation), bringing them under SEBI’s regulatory framework was a challenge. Krishan said,

“The biggest challenge was the financial records. Each municipality has its own way and own mannerism, which is usually codified as a law of how they all maintain their financial records. SEBI regulations mandated that they be submitted in a certain different format, so it was a big challenge. But legally speaking, we have standardised requisition lists which we send to the issuer, and then we hand hold them through the process of what information goes under which head of requisition...A lot of due diligence goes in.”

Way forward

Krishan said,

"The rationale behind this is to ensure that everybody at a smaller unit (municipality) is being made independent and answerable for the funding being raised. This model is clearly sustainable as we go forward and will adeptly aid in overall economic expansion. ”

According to her, municipal bonds are a very successful grassroots model. In the future, municipalities could choose to issue bonds to build schools, hospitals and other infrastructural requirements.