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What are Municipal Bonds? How to Buy Municipal Bonds in India? Research Team | Posted On Wednesday, January 29,2020, 04:24 PM

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What are Municipal Bonds? How to Buy Municipal Bonds in India?



The municipal bonds are an ideal way for ULBs to finance development projects and raise money quickly from the market. With the government introducing ambitious development projects for various cities, municipal bonds have helped the ULBs to bridge the funding shortfalls. Since these bonds come with high ratings, investors can park their surplus funds for guaranteed returns. The investor is repaid the invested principal along with interest over a period as decided by the municipal body.

Let’s try to understand what municipal funds are and how to invest in them through a detailed analysis.

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What are Municipal Bonds?

Municipal bonds are highly rated bonds issued by government bodies like municipal corporations to pool money for funding developmental projects. The urban local governments and agencies issue municipal bonds and the bonds are in line with the projects that urgently need money to finance infrastructural expenditures like smart cities and other urban development and maintenance projects.  

Municipal Bonds in India:

Municipal bonds are not a new concept in India. It was first introduced in the year 1997. The Bangalore Municipal Corporation is the first urban local body that issued municipal bonds. This was followed by Ahmadabad in succeeding years as it made some notable issues.

See Also: Municipal Bond

However, soon it lost ground after the initial momentum. The urban local governments soon lost progress due to fund mobilization. It failed to attract investors and failed o raise the funds required. To revive municipal bonds, market regulator SEBI came up with regulations for the issue of municipal bonds in 2015, thus enabling urban local governments to raise funds.

How to Buy Municipal Bonds in India?                      

Buying municipal bonds is not a difficult task. In India, municipal bonds can be bought through bond dealers, banks, brokerage firms and in few cases directly from the municipality. Municipal bonds are traded both in the primary market as well as in the secondary market. In the primary market, the new bonds are issued whereas the secondary market is mainly used for trading these bonds after the bond has been issued in the primary market.

Purchasing bonds from the primary market:

If you are willing to purchase municipal bonds from the primary market, then you have to follow the process of the retail order period. However, this is only possible if want to invest a high amount as such bonds are released in high denominations in the primary market. However, retail and institutional investors do not have to pay any fees for purchasing bonds in the primary market.

See Also: 10 Most Common Types of Bonds - Which of Them is Best For You?

Purchasing bonds from the secondary market:

The secondary market allows you to invest in bonds that have been already issued in the primary market. You can do this through other investors, bond dealers, brokerage firms and banks. However, you need a Demat account to purchase such bonds. You may then proceed to find the bonds as per your choice. While purchasing bonds in the secondary market, the price of the bonds includes a markup i.e. the dealer’s cost plus profit.

SEBI Guidelines on Municipal Bonds:

As discussed, SEBI has introduced certain guidelines to strengthen municipal bonds. According to the circular issued by SEBI, in 2015, a municipal or a Corporate Municipal Entity (CME) should fulfil the below-mentioned conditions:

  • The ULBs must showcase a negative net worth in each of the three immediately preceding financial years.
  • The municipality must not have default records in the repayment of debt securities and loans obtained from banks or financial institutions within the last 365 days.
  • Any municipal entity, like the municipality promoters or the directors, must not be listed under wilful defaulters list published by the RBI. The municipality must not have any records of default in the payment of interest or repayment of the principal amount in respect to debt instruments issued to the public.
  • SEBI also states that municipal bonds must contain mandatory ratings above investment grade for gaining rights of public issue. The bonds should have maturity tenure of 3 years and financial institutions like banks must be appointed as monetary agencies.

See Also: How to Buy Bonds in India?

Are municipal bonds taxable?

In India, municipal bonds are usually tax-free if they conform to certain regulations and thus their interest rates will be market-linked. The market watchdog, SEBI allowed ULBs to raise money through the issue of revenue bonds as well. The municipal bonds where the funds raised are kept for one project are known as revenue bonds. Servicing of such bonds can be done through the revenue accrued from the project.

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