Civic bodies likely to hit Bond Street to raise up to Rs 1,000 crore

“Vadodara is looking at ₹100-150 crore, while Chennai is looking at around ₹300 crore. Kolkata could issue bonds around ₹300-350 crore while the UP-based municipal corporations would together be looking at around ₹200 crore,” a source close to the development said.

“Typically, these bonds are five-year papers and the funds are used for developing projects related to water, sewage amongst other municipal activities. The major activity in this space will take place in the second and third quarter,” the source said.

In coming days, another municipal body – the Pimpri Chinchwad Municipal Corporation- is set to conduct a five-year bond sale for up to ₹200 crore, marking the first debt sale by a civic body in the current financial year.

The issuances of bonds by municipal bodies comes amid a push from the Reserve Bank of India (RBI) for civic bodies to explore alternative routes of financing.

“As the demand for infrastructure grows among Indian cities, MCs (municipal corporations) must further explore ways to reinvigorate and foster alternative and sustainable resource mobilisation through municipal bonds,” the RBI wrote in a November 2022 report.

The central bank mentioned that nine municipal corporations had raised ₹3,840 crore during 2017-21, although issuances dropped after 2018.The government provides financial incentives in the form of a lump-sum grant-in-aid for municipal bond issuances at the rate of Rs 13 crore per Rs 100 crore of bonds issued under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT, 2015) Programme.

For investors, the appeal of municipal bonds stems from the fact that bonds issued by civic bodies offer higher returns than government securities of similar maturity, even as municipal bonds are considered to be relatively low-risk instruments.

“One of the spaces that is likely to see traction now is pooled finance, because the way things stand right now it is not easy for smaller municipalities to raise funds through bonds,” a source said.

Pooled finance refers to a process under which a common bond is issued by pooling the resources of several local bodies.