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Second coming of the municipal bonds juggernaut

Mumbai city news: Will Mumbai bite the bonds bullet? There appear to be a divergence of views

mumbai Updated: Jun 21, 2017 19:34 IST
Smruti Koppikar
Municipal Commissioner Ajoy Mehta said in February this year that it “does not make sense for the Brihanmumbai Municipal Corporation to issue bonds because they are riskier than fixed deposits” which it has enough of.
Municipal Commissioner Ajoy Mehta said in February this year that it “does not make sense for the Brihanmumbai Municipal Corporation to issue bonds because they are riskier than fixed deposits” which it has enough of.(HT)

The story of Indian urban local bodies’ finances has been a rather grim one, the lack of new infrastructure and crumbling civic services are explained away as a result of “finance crunch”. The Pune Municipal Corporation (PMC) re-discovered – and demonstrated – this week that municipal bonds offer a way out. It raised Rs 200 crore through the Bombay Stock Exchange’s bond trading platform at a coupon rate of 7.59% for ten years, and sits snug with the knowledge that the bonds were over-subscribed by six times, that is Rs 1,200 crore.

Municipal bonds are debt instruments by which a municipal corporation or municipality raises money from individuals or institutions, and promises to pay a specified amount of interest and returns the principal amount on a specific maturity date. These bonds are usually of two kinds: General bonds where money use is not specified and Revenue bonds where money is raised for specific income-generating projects and its revenues are used to repay. The latter are more popular.

The PMC’s municipal revenue bonds will fund its ambitious water supply project in a city that witnessed spectacular expansion in the last decade. “We require a total of Rs 3,300 crore for the project and expect to raise nearly Rs 2,300 crore by issuing municipal bonds…we will go in for more tranches as and when we require funds,” Kunal Kumar, PMC Commissioner, told the media.

The municipal corporations of New Delhi, Ahmedabad and half a dozen other cities have lined up the necessary documentation and credit ratings to issue municipal bonds in the next year. The total value of these bonds could be in the region of Rs 6,000 crore, say financial analysts. This is the second coming of the municipal bond.

They were first issued in India in 1997, five years after the 74th Constitutional Amendment decentralised urban local bodies, gave them autonomy, made them accountable to citizens, and reformed their finances enabling them to access capital markets and financial institutions. The Bengaluru municipal corporation issued municipal bonds first followed by the Ahmedabad civic body in 1998. Then the municipal bond market went to sleep, so to speak, barely raising Rs 1,350 crore in 15 years. It revived in 2015 after the Securities and Exchange Board of India (SEBI) issued a revised set of regulatory guidelines.

Will Mumbai bite the bonds bullet? There appear to be a divergence of views. Municipal Commissioner Ajoy Mehta said in February this year that it “does not make sense for the Brihanmumbai Municipal Corporation to issue bonds because they are riskier than fixed deposits” which it has enough of. Besides, large chunks of budgeted outlays for infrastructure lie unspent every year.

However, his predecessor Sitaram Kunte had stated at a high-powered event two years ago that the BMC had sought permission from previous governments to issue bonds worth Rs 2,000 crore; it had been denied. Chief Minister Devendra Fadnavis, present on the occasion, had assured that permission would be given but he was “more concerned about the under-utilisation of funds raised”. How did two successive commissioners arrive at contradictory assessments?

Capital market believers vouch that municipal bonds instrument is a sound way to finance large projects as cities grow, especially as the Smart Cities Mission is pushed ahead. Critics, however, say that the indirect participation of powerful investors and financial institutions in the city’s infrastructure is undemocratic, and worry that basic civic services could turn profit-oriented. They also point to the risk for individual investors if the municipal corporation defaults on repayment, as is happening in China now.

With the Centre allocating Rs 400 crore to help with repayment and interest, the municipal bonds juggernaut is rolling again. The ideal situation would be for small investors to participate in their city’s growth, avail robust civic services, and get a return on their investments.