Municipal Bonds - Meaning, Grades, Taxability and SEBI Guidelines

Municipal Bonds

Indian administration structure has three levels: the Central Government, State Government, and Local Municipal Body. The State and Central Governments raise funds for their developmental works through the taxes they collect from people, including both direct and indirect taxes.

Other than the taxes, the Central Government funds its projects through the issue of securities, bonds and treasury bills. The State Governments raise funds through developmental loans. These loans are bonds which are made available in the market.

Local municipal bodies is the bottom level of the administration of the country according to financing capabilities. The local municipal bodies get funds for their developmental projects by issuing municipal bonds with proper guidelines.

What are Municipal Bonds?

Municipal bonds are also called 'muni bonds'. The urban local government and agencies issue such type of bonds. Municipal bonds are issued when a government body requires funds for infrastructure projects like roads, airports, railway stations, schools etc.

The Securities and Exchange Board of India (SEBI) issued proper guidelines in 2015 for the urban local municipal bodies to raise funds by giving municipal bonds.

(Also Read: Government Bonds/G-sec bonds)

Municipal Bonds in India

Municipal bonds first issued in India in the year 1997. Bangalore Municipal Corporation is the primary urban local body to issue municipal bonds in India. Ahmedabad followed Bangalore in the succeeding years.

The municipal bonds lost the ground after the underlying investors' fascination it got and neglected to raise the ideal amount of funds. To revive the municipal bonds, the market watchdog SEBI released guidelines for the issue of municipal bonds in 2015.

What are the SEBI Guidelines on Municipal Bonds?

The new guidelines as commanded by SEBI are –

The municipal body should not have a background marked by defaulting at repayments of loans or debt instruments procured from financial institutions in the previous year.

It ought to have positive net worth taking all things together the three years going before the issuance of municipal bonds.

Such municipal entity, its Group Company or directors, and promoters will not be referenced in the headstrong defaulters' rundown distributed by the Reserve Bank of India.

Municipal bonds having a credit rating of BBB and higher as pronounced by top credit rating agencies in India (for example CRISIL) can be issued to people in general. These ratings have been doled out trying to validate and advocate these bonds' credibility and to impel investors' trust in them.

Nonetheless, it very well may be so that after these bonds are issued in the market and hence traded in the auxiliary market, for example stock exchange, their credibility may waver because of the concerned municipality's waning financial performance. This may prompt a reduction in such bond prices. Then again, if a municipal corporation performs well after such issuance, its security prices will appreciate.

(Also Read: Gilt Funds)

Grade of the municipal bonds

The market regulator has ordered that the municipal bonds should have a rating over the investment-grade for the public issue. The bonds should accompany a maturity time of three years and financial institutions like banks should be delegates as a fiscal bureau.

Taxability of municipal bonds

The municipal bonds in India appreciate without tax status if the investors stick to the rules, and the interest rate relies upon how the markets reasonable. Bonds can be issued on open or the private premise.

The SEBI let urban local bodies fund-raise for the developmental works by giving revenue bonds. Revenue bonds are those bonds from whose revenue is utilized for one explicit task. The revenues generated from the undertaking is utilized to pay out the security investors.

Factors of Risk & Return in Municipal Bonds

Municipal bonds are currently offering the interest rates around 8% or above (long-term bonds). If an investor buy through secondary market, the interest rate is 7.25% to 8%. However, you must take an advice from the investors who have invested in municipal bonds and have been getting good returns.

Risk factor is same important as returns. There are many agencies who give ratings to the bonds. An investor must check such ratings before investing in municipal bonds.

List of Municipal Corporations that have collected funds by issuing bonds in recent years

      Municipal 

   Corporations     Year of issue     Amount Collected

                                                                 (in Crore)

      Ghaziabad             2021                     150

       Lucknow              2020                    200

Vishakhapatnam       2019                      80

         Bhopal                2018                     175

(Also Read: Gilt-edged market)