Sebi notifies norms for issuance and listing of municipal bonds

To help the government's 'smart cities' programme, capital markets regulator Sebi on Wednesday notified new norms for listing and trading of municipal bonds on stock exchanges.

The move would allow authorities to mop-up funds, including for setting up smart cities, by raising money from the public and institutional investors.

Under the new norms, the municipal authorities would need to have a strong financial track record and such bonds would be listed on stock exchanges.

Conservative Indian investors mostly invest in fixed deposits, small saving schemes or gold.

Now, bonds issued by municipalities having good financial track record would be another alternative investment opportunity for them. Such bonds would provide reasonable return with less risk, which in turn may accelerate the capital markets.

Commonly known as 'muni bonds', these investment products are very popular among investors in many developed nations, especially the United States, where muni bonds have attracted investments totalling over US $500 billion and are among preferred avenues for household savings.

For issuing debt securities to public under the regulations, municipalities need not have negative net worth in any of the three immediately preceding financial years.

Besides, the authority should not have defaulted in repayment of debt securities or loans obtained from banks or financial institutions, during the last one year.

"The corporate municipal entity, its promoter, group company or director, should not have been named in the list of the willful defaulters published by the RBI or should not have defaulted of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any," Sebi said in a notification.

An issuer making public issue of debt securities can only issue revenue bonds. The issuer should have obtained rating from at least one credit rating agency.

The revenue bonds would have a maximum tenure of thirty years or such period as specified by Sebi from time to time.

The issuer shall appoint at least one merchant banker.

The issuer would have to appoint a monitoring agency such as public financial institution or a scheduled commercial bank to monitor the earmarked revenue in the escrow account.

The issuer would have to decide the minimum subscription amount which it seeks to raise by issue of debt securities and disclose the same in the offer document.

The minimum subscription limit would not be less than 75% of the issue size.

In case of non-receipt of minimum subscription, all application money received in the public issue would be refunded to the applicants within 12 days from the date of closure of the issue.

However, in case of a delay by the issuer in making the refund, then the issuer would refund the subscription amount along with an annual interest of 10% for the delayed period. 

With regard to disclosures, Sebi said that offer document would contain "true, fair and material disclosures, which are necessary for the subscribers of the revenue bonds to take an informed investment decision."

Sebi said that no issuer would make a public issue of revenue bonds unless a draft offer document has been filed with the designated stock exchange through the lead merchant banker.

"Provided that where an issuer has filed a shelf prospectus, not more than four public issuances shall be made through a single shelf prospectus during a financial year," Sebi noted.

The funds raised from public issue of debt securities would be used only for projects that are specified under objects in the offer document, it added.

The issuer would have to set up a separate project implementation cell and designate a project officer for monitoring the progress of the project.

"Issuer's contribution for each project shall not be less than 12% of the project costs, which shall be contributed from their internal resources or grants," Sebi noted.

In December last year, Sebi had floated draft norms for 'Issue and Listing of Debt Securities by Municipality' and had sought public comments till January 30.

While such bonds have been issued by various municipal authorities in the country, the total funds raised through them stand at only about Rs 1,353 crore.

The Bangalore Municipal Corporation was the first to issue a municipal bond of Rs 125 crore with a state guarantee in 1997.

However, access to capital market commenced in January, 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without state government guarantee for financing infrastructure projects in the city.

Asset management companies raised Rs 100 crore through its public issue.

Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds.

However, there is no provision as yet for listing and subsequent trading of muni bonds on stock exchanges in India.

As per guidelines of the Urban Development Ministry, only bonds carrying interest rate up to a maximum of 8% per annum shall be eligible for being notified as tax-free bonds.

Sebi's Corporate Bonds and Securitisation Advisory Committee was of the view that having a fixed rate of 8% might not attract investors.