Capital Markets: Challenges and Developments

What are Municipal Bonds?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Municipal Bonds

Mains level : Fund raising mechanisms for local bodies

Bonds issued by the Lucknow Municipal Corporation (LMC) got listed on the Bombay Stock Exchange. It’s the ninth city in the country to raise capital through municipal bonds.

Find out the rest eight cities issuing Municipal Bonds in India. Do let us know in the comment box.

What are Municipal Bonds?

  • A municipal bond or muni bond is a debt instrument issued by municipal corporations or associated bodies.
  • 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, et al.
  • 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.
  • 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 capitalized on the new guidelines to fund initiatives such as Atal Mission for Rejuvenation and Urbanisation Transformation (AMRUT) and Smart Cities Mission.

Their types

There are primarily two types of municipal bonds in India, categorised as per their usage. These are –

(1) General Obligation Bonds

  • These 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.

(2) Revenue Bonds

  • These 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 such Bonds

There are multiple advantages of investing in municipal bonds which include –

(1)Transparency

Municipal 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.

(2)Tax benefits

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.

(3) Minimal risk

Municipal bonds are issued by municipal authorities, implying involvement of minimal risk with these securities.

Their limitations

The disadvantages of municipal bonds are enumerated below –

(1) Long maturity period

  • Municipal bonds come with a lock-in period of three years, imposing a burden on the liquidity requirements of investors.

(2) Low-interest rates

  • Even though interest rates on municipal bonds, in some cases, are higher than other debt instruments, these rates are considerably low when compared to returns from market-linked financial instruments such as equity shares.
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Aishwarya Singh
Aishwarya Singh
1 year ago

Cities that issued Municipal Bonds in India :
Ahmedabad
Amaravati
Vishakhapatnam
Surat
Bhopal
Indore
Pune
Hyderabad
Lucknow (Latest Addition)