SEBI Launches Information Database on Municipal Bonds

In News

• Recently, Markets regulator SEBI launched an information database on municipal bonds.

More about the news

• Programme on municipal bonds and municipal finance:
  • As part of efforts to develop the bond markets, an outreach programme on municipal bonds and municipal finance was organised by SEBI in New Delhi.
• The information database:
  • The information database contains a wide range of information in the form of 
    • Statistics and regulations, 
    • Circulars, 
    • Guidance note and 
    • Frequently Asked Questions issued by Sebi in respect of municipal debt securities.

About Municipal Bonds

• About:
  • A municipal bond or muni bond is a debt instrument issued by municipal corporations or associated bodies in India. 
• Utilisation:
  • These local governmental bodies utilise the funds raised through these bonds to finance projects for socio-economic development through building bridges, schools, hospitals, providing proper amenities to households, etc.
• Maturity period & returns:
  • Such bonds come with a maturity period of three years, whereby municipal corporations provide returns on these bonds either from property and professional tax collected or from revenues generated from specific projects or both.
• SEBI’s guidelines related to the issuance of municipal bonds:
  • The Securities and Exchange Board of India (SEBI) revised the guidelines related to the issuance of municipal bonds in 2015 in an attempt to enable ULBs or local government bodies to raise finances from such sources. 
  • Following this measure, different cities have capitalised on the new guidelines to fund initiatives such as Atal Mission for Rejuvenation and Urbanisation Transformation (AMRUT) and Smart Cities Mission.

Types of Municipal Bonds in India

• There are primarily two types of municipal bonds in India, categorised as per their usage. These are –
  • General Obligation Bonds:
    • As the name suggests, General Obligation Bonds are issued to raise finances for general projects such as improving the infrastructure of a region. 
    • Repayment of the bond, along with interest, is processed through revenue generated from different projects and taxes.
  • Revenue bonds:
    • Revenue bonds, on the other hand, are issued to raise finance for specific projects, such as the construction of a particular building. 
    • Repayment of such bonds (principal and accrued interest) shall be paid through revenues explicitly generated from the declared projects.

Advantages of Municipal Bonds

• Transparency: 
  • These bonds that are issued to the public are rated by renowned agencies such as CRISIL, which allows investors transparency regarding the credibility of the investment option.
• Exemption from taxation:
  • In India, municipal bonds are exempted from taxation if the investor conforms to certain stipulated rules. In addition to such conformation, interest rates generated on such investment tools are also exempt from taxation policy.
• Low Risk:
  • These are issued by municipal authorities, implying involvement of minimal risk with these securities.
• Significant for ULBs:
  • They are crucial for the financial independence of the Urban Local Bodies. 

Disadvantages

• The yield is low and the bonds may not be able to beat inflation over the long term.
• The bonds lose value as the interest rate goes up and may get traded at a value less than face value.
• There is also a need for State guarantees for the bonds.

Source: BS