Muni Bonds - norms for listing and trading

Muni Bonds - norms for listing and trading

Question – Muni bonds are the perfect addition to the Indian stock exchange. Discuss SEBI’s new norms for listing and trading of such bonds as well as establishment of IFSCs for smart cities such as GIFT-TEC

For aiding the “smart cities” programme of the government, SEBI has proposed a fresh set of norms for the listing and trading of municipal bonds on stock exchanges

• This is while channelising the household investments for urban infrastructure development

• This would enable authorities to raise funds including for the establishment of smart cities through fund raising from public as well as institutional investors

• Strong track record is needed for municipal authorities and such bonds will be listed on the stock exchanges

• Conservative investors in India chiefly invest in fixed deposits, small saving schemes or gold

• Muni bonds will also be a source of alternative investment for them

• These bonds provide reasonable returns with low element of risk which in turn jumpstarts the capital market

• Muni bonds are very popular in developing as well as developed nations; have attracted over USD 500 billion and are the preferred avenue for household savings

• SEBI has also floated draft norms for “Issue and Listing of Debt Securities by Municipality”

• Muni bonds can also be a source of investment for provident funds, pension funds and insurance companies

• Other municipal boards which have issued such bonds: Hyderabad, Nashik, Vishakhpatnam, Nagpur and Chennai

• Currently, there is no provision for listing and trading of muni bonds on stock exchanges
• Guidelines of the Urban Development Ministry state only bonds with interest rate of a maximum of 8% per annum should have the eligibility to be notified as tax free bonds

• Guidelines were also announced by SEBI for International Financial Services Centres

• The first of these centres will be completed at the Gujarat International Finance Tec-City(GIFT-TEC)

• These economic zones will also compete with financial hubs including Singapore and Dubai in a bid to garner a share of international business

• SEBI guidelines permit foreign firms to raise capital within the economic zone through depository receipts and debt securities

• These also require the stock exchanges to complete business with low levels of capital

• Regulatory authority also announced a simpler pricing formula for banks for debt conversion to equity of firms in distress

• Lenders can now convert at a price arrived through fair price formula that is not lower than the face value

• Creditors will gain a 51% stake in such companies at fair or face value of the share, whichever is higher

• SEBI also indicated that norms for muni bonds have safeguards including linking bonds to certain projects and keeping revenue generated from projects in escrow accounts to provide protection to investors

• Foreign pension funds display interest in such bonds as India plans to construct close to 100 smart cities

Facts and Stats

• Total funds raised by these bonds stand at INR 1,353 crore

• The first municipal corporation in India to issue municipal bond of INR 125 crore with state guarantee in 1997 is the Bangalore Municipal Corporation

• Access to capital market started in the first month of 1998 when the AMC/Ahmedabad Municipal Corporation issued the first municipal bonds in the nation without a guarantee from states for financing of infrastructure projects in the city INR 100 crore were raised through public issues