The Munis of India: Facilitating municipal bonds

Rhea Shah, Executive | finserv@vinodkothari.com

India may be said to be the land of munis and rishis; however, when it comes to what the capital markets know as munis, namely, municipal bonds, India lags substantially behind other bond issuing jurisdictions. The Municipal Bonds market is still at the nascent stage, thereby requiring a robust regulatory framework and other regulations to be in place for its effective functioning. Issued by municipal authorities and government entities to meet their day-to-day operational needs, munis in the Indian market context are generally seen as a favourable investment to make.   Our detailed articles on the subject may be viewed here^[1].

Munis in the Economic survey

As per the Economic Survey, the yields of municipal bonds during the year 2022-2023 have seen a significant rise, thereby enhancing investors’ interest in the market. The Union Budget was expected to bring about favorable outcomes for munis thereby having an effect of promoting the further development of the market and simultaneously ensuring its due regulation.  In the recent period, there has been a resurgence of municipal bond issuances in India, with nine MCs raising around ₹3,840 crore during 2017-21.

Global scenario^[2]

The US municipal bond market has remained volatile during the end of the year 2022. Municipal bonds produced positive performance in the fourth quarter, despite heavy tax-loss selling, accelerating fund outflows and higher U.S. Treasury rates. While the supply for municipal bonds in the US market for issuance of new bonds was low, it was readily absorbed by the investors in pursuance of reliable income. The US bond market has been highly macro-driven during the year 2022 thus making the sell off for municipal investors difficult.

Munis in recent SEBI amendments

Introduction of Information database and Repository on Municipal Bonds-

The SEBI, via press release on the 22^nd of January 2023, in order to support its initiative of developing the bond market and to provide a common platform to discuss upon the grievances of issuers and investors in the market, held an outreach programme. In the programme, to assist municipal debt issuers and other stakeholders in the Municipal Debt market, the SEBI launched an Information Database including a repository of information pertaining to Municipal Bonds on its website, which can be accessed through a QR Code as well. The information database consists of guidance notes, circulars and regulations in relation to municipal bonds, thereby creating awareness and answering frequently asked questions on the matter.

Munis in the Union Budget 2023

The Union Budget 2023 aims at making cities in India ready for municipal bonds and to witness the rise in the municipal bond market that is likely to be seen in the near future pursuant to increasing yield rates and investors’ interest in the market. The budget provides that through property tax governance reforms and ring-fencing user charges on urban infrastructure, cities will be incentivized to improve their credit worthiness for municipal bonds. Along with having a positive spillover effect over municipal finances, such a measure will also lead to growth in the municipal bond market from the nascent to near maturity stage.

As a measure for fiscal management, the entire fifty-year loan to states has to be spent on capital expenditure within 2023-24. While most of the spending of such loan amount shall rest at the discretion of the states, parts of the outlay will also be linked to, or allocated for financing reforms in urban local bodies to make them creditworthy for municipal bonds.

^[1] https://vinodkothari.com/2019/05/municipal-bonds-way-forward/

Municipal Bonds: An understanding – Vinod Kothari Consultants

^[2] Quarterly municipal bond outlook: Municipal bonds: Tailwinds emerge in 2023 (nuveen.com)