Context:
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- Municipal Bonds (Munis) are being aggressively promoted by policy bodies like NITI Aayog and schemes like AMRUT 2.0 as a new, self-sustainable source of long-term debt capital for financing urban infrastructure projects.
Key Highlights / Details:
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- Definition & Purpose: Municipal bonds are debt instruments issued by Urban Local Bodies (ULBs) or their agencies to raise capital from the market for infrastructure development (e.g., water supply, sewerage, roads).
- Regulatory Framework: Issued under guidelines set by the Securities and Exchange Board of India (SEBI), revised in 2015. SEBI mandates a rating above investment-grade and requires ULBs to maintain escrow accounts for debt servicing.
- Tax Benefits: The interest earned on municipal bonds is often exempted from income tax for investors, making them an attractive fixed-income investment.
- Policy Push (AMRUT 2.0): The government offers substantial incentives (e.g., ₹13 crore for every ₹100 crore raised on the first issue) to reduce the effective borrowing cost for ULBs. There is also a push for Green Municipal Bonds (for water, sanitation, and renewable energy projects).
- Challenges/Pitfalls:
- Low Uptake: Since 1997, only a small number of ULBs (around 21-22) have issued bonds, with the overall market size remaining modest compared to international standards.
- Weak Creditworthiness: Due to over-reliance on grants and weak property tax collection, many ULBs lack the strong financial health required to secure investment-grade credit ratings.
- Liquidity: The secondary market for these bonds is generally underdeveloped, affecting their tradability.