The primary constraints in developing a municipal bond market, are the lack of timely and publicly available information on fiscal performance, debt and contingent liabilities, as well as governance and management issues, international rating agency Moody’s said in a report, on May 9, 2018. The municipal bond market remains relatively shallow, with a total of 30 issuances to date from several urban local bodies (ULBs), amounting to only around Rs 1,700 crores. Moreover, over 75 per cent of the municipal bonds to date, were issued before 2006.
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These shortcomings have impeded the ability to assess the creditworthiness of ULBs, thereby, limiting investor appetite for municipal bonds, it added. The report further said that restrictions on the maximum interest rates that ULBs can offer and unfavourable rules regarding income tax on interest earned by bond holders, have constrained the market’s development. Urban local governments have a weak track record of timely project implementation and completion, which in turn, weakens projected cash flows, lowering the perceived credibility of municipal bonds. “Improved disclosure and greater transparency, are a prerequisite for a fully functioning bond market. A divergence is also apparent in disclosure between issuers, with the states showing higher levels than the cities,” the report said.
In 2015, market regulator SEBI had introduced a new set of regulations, designed to further develop and deepen the municipal bond market. The law primarily requires wider and more timely financial disclosure by ULBs. “While the introduction of the new regulations in 2015 imposed more stringent financial disclosure standards on urban local bodies to issue bonds, their slow implementation reflects the significant challenges that such entities face in meeting minimum disclosure standards,” the report noted.
In June 2017, the Pune Municipality issued a Rs 200-crore municipal bond, to fund improvements to the city’s water supply. In February 2018, the Hyderabad Municipal Corporation raised Rs 200 crores through bonds, to help fund a road project. “As an indication of the market’s potential and the level of investor interest, both issues were oversubscribed, the former by six times and the latter by two times,” the report added.
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