T
HE Smart Cities Mission
guidelines talk about the
active financial role
played by the Municipal
Corporations to fund their growing
infrastructure requirements. Mu-
nicipal bonds are important step in
this direction that aim to make the
Urban Local bodies (ULBs) finan-
cially independent and the projects
economically viable. The concept of
Municipal Bond is still in nascent
stage in India, however, with the
right policy framework, municipal
bonds can be an attractive alterna-
tive to the retail and institutional
investors and can serve as a valuable
future model to fund various city
centric project.Municipal Bond Market in India
The Municipal Bond or ‘Muni’
Bonds is a very popular concept
among the western countries, espe-
cially in the US. These ‘Muni bonds’
have attracted investments totalling
over $500 billion and are among
preferred avenues for householdsavings. In the US, municipal bond
market is around $3.7 trillion and in
China $187 billion.
In India, however, the federal
structure of municipal corporations
and the existing regulatory frame-
work has limited the nature and
scope of Municipal Bond markets in
India which is yet to realize its full
potential. The government made
some effort to develop municipal
bond market. The Rakesh Mohan
Committee, set up in 1994, has
worked on the commercialization of
Infrastructure to provide interna-
tional experience on tax-free mu-
nicipal bonds. Yet the effort was
limited to few cities. Bangalore Ma-
hanagara Palike was the first ULB to
have raised resources through pri-
vate placement of municipal bonds
in 1997. Ahmadabad Municipal
Corporation followed the suit and
was the first to make a public offer-
ing in January, 1998. It issued
Rs.1,000 million in bonds to par-
tially finance a Rs.4,390 million wa-
ter supply and sewerage project.Since 1998, other cities including
Nashik, Nagpur, Ludhiana, and
Madurai have accessed the capital
markets through municipal bonds
without state government guaran-
tee. In 2003, the Tamil Nadu Urban
Development Fund issued a bond
by pooling 14 municipalities for
commercially viable water and sew-
erage infrastructure projects. Sub-
sequently, the Government of Kar-
nataka used the concept of pooled
financing to raise debt from inves-
tors for the Greater Bangalore Wa-
ter Supply and Sewerage Project
(GBWASP). In most cases, bond
proceeds have been used to fund
water and sewerage schemes or
road projects. However largely the
market remained untapped and af-
ter 2010, no Municipal Bonds were
issued. Till 2010, only 28 municipal
bond issues have taken place in In-
dia, which have included both taxa-
ble and tax-free bonds and pooled
financing issues and majority of
them have been private placementsBANKING ON
THE MUNICIPAL
BONDS
Municipal Bonds have evolved as an important tool to finance
cities across the globe. However, lack of policy initiatives restricted
the growth of Municipal Bond market in India, which is crying for
structural reformsCover Story