How Modi government plans to boost municipal bond issuance
What's the story
The Indian government is mulling an increase in the interest subvention cap beyond the current limit of ₹26 crore per urban local body (ULB). The move is aimed at promoting the issuance of municipal bonds for urban infrastructure development under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT). Despite initiatives like AMRUT and Smart Cities Mission, progress in mobilizing funds through these bonds has been slow.
Subvention details
What is the interest subvention?
The interest subvention is given to municipal bodies under AMRUT, making municipal bonds (or 'muni bonds') more appealing. The current limit of ₹26 crore is the maximum interest subvention a ULB can get from the Ministry of Housing and Urban Affairs (MoHUA) for issuing these bonds. To incentivize this market and encourage more civic bodies to participate, the central government has offered a 2% interest subvention on such bond issues.
Bond benefits
For 1st bond issuance, incentives capped at ₹13cr
For their first bond issuance, ULBs can get incentives up to ₹13 crore for every ₹100 crore raised, with a cap of ₹26 crore under AMRUT 2.0. For subsequent issuances, the bonds must be categorized as green bonds focusing on sectors like water, sanitation, renewable energy or urban resilience. In such cases, ULBs would be eligible for incentives of ₹10 crore per ₹100 crore raised with a cap of ₹20 crore.
Market challenges
Slow progress in municipal bond market
Despite SEBI issuing detailed guidelines for ULBs to raise funds via municipal bonds a decade ago, progress has been limited. Various central and state government initiatives aimed at improving municipal infrastructure and encouraging ULBs to tap the capital market have yet to yield significant results in mobilizing funds through these bonds.
Institutional support
NaBFID to assist ULBs in developing, issuing municipal bonds
The National Bank for Financing Infrastructure and Development (NaBFID) may empanel agencies like merchant bankers, brokers, as well as rating agencies to offer expertise and guidance to municipal corporations. This is aimed at helping them develop and issue municipal bonds. NaBFID, as a development finance institution, can assist with statutory paperwork and compliance with SEBI's listing requirements among other things.